Anticipation, learning and welfare: the case of distortionary taxation

Abstract

We study the impact of anticipated fiscal policy changes in the Ramsey economy when agents form expectations using adaptive learning. We extend the existing framework by distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour. Moreover, we demonstrate that this behaviour can have important implications for the welfare consequences of fiscal reforms.Fiscal Policy; Adaptive Learning; Oscillations