Are Policy Variables Exogenous: The Econometric Implications of Learning While MaximizingLecture Notes in Economics & Mathematical Systems, Vol 364 - Softcover

Balazs Horvath

Softcover

ISBN 10: 0387542876 ISBN 13: 9780387542874

Publisher: Springer Verlag, 1991

Synopsis

This book explores the econometric implications of a policy-maker's learning. In a simple discrete model the policymaker maximizes the discounted sum of tax revenues subject to a constraint which involves an unknown parameter specifying the occurrence of Bayesian learning. An optimal balance needs to be found between maximizing current payoff and generating information which enhances the efficiency of maximization in subsequent periods. Learning is demonstrated to affect the exogeneity status of policy variables in small samples and to have implications analogous to the phenomenon in the focus of the Lucas critique. Active learning is proven to be a distinct cause of time inconsistency of optimal plane. It is argued that learning cannot be dismissed as a merely transitory source of these phenomena. A simulation exercise supplies quantitative evidence. Finally, the data generated are used to perform empirical exogeneity tests. Results show that the effect of Bayesian learning is empirically detectable. Learning is generally accepted as the driving force towards a rational expectations equilibrium with perfect information. In this context, the result on the loss of exogeneity of policy variables is an out-of-equilibrium econometric implication of the rational expectations hypothesis. This book is the first to explore the effect of an informational feedback on exogeneity.

Edition details

• Publisher: Springer Verlag
• Publication date: 1991
• Language: English
• ISBN 10: 0387542876
• ISBN 13: 9780387542874
• Binding: Paperback
• Number of pages: 162