Fiscal Foresight and Information Flows
Fiscal foresight -- the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future -- is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.
Leeper acknowledges support of NSF Grant SES-0452599. Most of this research was done while Yang was at Academia Sinica. We also acknowledge comments by Troy Davig, Dale Henderson, Beth Klee, Karel Mertens, Ricardo Nunes, Morten Ravn, Chris Sims, and participants at presentations at the Congressional Budget Office, the Federal Reserve Board, the Reserve Bank of New Zealand, Sveriges Riksbank, the Bank of Korea Conference "Recognizing and Coping with Macroeconomic Model Uncertainty in Designing Monetary Policy," the Third International Conference on Macroeconomics in Madrid, UCSD, UC-Irvine, Federal Reserve Bank of Atlanta, University of Auckland, University of Otago, University of Canterbury, and Victoria University of Wellington. We are particularly grateful to Jim Nason and Harald Uhlig for helpful comments. The views expressed in this paper are those of authors and should not be interpreted as those of the Congressional Budget Office nor of the National Bureau of Economic Research.
Eric M. Leeper & Todd B. Walker & ShuâChun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, 05. citation courtesy of