Anticipation,learning and welfare: the case of distortionary taxation |
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| Affiliation: | 2. School of Economics & Finance, University of St Andrews, Castlecliffe, The Scores, St Andrews, Fife KY169AL, UK;1. Vaccine and Infectious Disease Organization-International Vaccine Centre, University of Saskatchewan, Saskatoon, Saskatchewan, Canada;2. Vaccinology and Immunotherapeutics, School of Public Health, University of Saskatchewan, Saskatoon, Saskatchewan, Canada;3. Department of Veterinary Microbiology, Western College of Veterinary Medicine, University of Saskatchewan, Saskatoon, Saskatchewan, Canada;1. Institute of Statistical Science, Academia Sinica, Taipei, Taiwan, ROC;2. Department of Mathematics and Statistics, Indian Institute of Technology Kanpur, Kanpur - 208 016, India;3. Decision Sciences Area, Indian Institute of Management Lucknow, Lucknow - 226 013, India;1. Department MEMOTEF, Sapienza University of Rome, Italy;2. Department of Economics and Law, Sapienza University of Rome, Italy;3. Council of Experts, Ministry of Economy and Finance, Italy;4. School of European Political Economy, Luiss, Rome, Italy;5. Department of Treasury, Ministry of Economy and Finance, Italy |
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| Abstract: | ![]()
We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labor supply, which makes agents’ decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behavior that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms. |
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| Keywords: | Fiscal policy Adaptive learning Oscillations Welfare |
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