Policy change and learning in the RBC model

Kaushik Mitra, George W. Evans, Seppo Honkapohja

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)


What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
Original languageEnglish
Pages (from-to)1947-1971
JournalJournal of Economic Dynamics and Control
Issue number10
Early online date22 May 2013
Publication statusPublished - Oct 2013


  • Taxation
  • Government spending
  • Expectations
  • Permanent policy changes


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