TY  - JOUR
AU  - Leeper,Eric M.
AU  - Walker,Todd B.
AU  - Yang,Shu-Chun Susan
TI  - Foresight and Information Flows
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16951
PY  - 2011
Y2  - April 2011
UR  - http://www.nber.org/papers/w16951
L1  - http://www.nber.org/papers/w16951.pdf
N1  - Author contact info:
Eric M. Leeper
Department of Economics
304 Wylie Hall
Indiana University
Bloomington, IN  47405
Tel: 812/855-9157
Fax: NA
E-Mail: eleeper@indiana.edu

Todd B. Walker
Department of Economics
105 Wylie Hall
Indiana University
Bloomington, IN  47405
E-Mail: walkertb@indiana.edu

Shu-Chun Susan Yang
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
Tel: 202-226-2762
E-Mail: ssyang@econ.sinica.edu.tw
AB  - News--or foresight--about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized tax information flows. Differential U.S. federal tax treatment of municipal and treasury bonds embeds news about future taxes in bond yield spreads. Including that measure of tax news in identified VARs produces substantially different inferences about the macroeconomic impacts of anticipated taxes.
ER  -