Reproduction permitted only if source is stated. ISBN 978-3-86558-991-0 (Internetversion) Non-technical summaryPartly motivated by the recent financial crisis and the subsequent recession, economists have recently placed greater emphasis on identifying uncertainty about monetary and fiscal policy as a potentially important factor determining economic outcomes, as highlighted by Baker, Bloom, and Davis (2012). Natural questions seem to be how this uncertainty arises, what the exact transmission mechanism is and how this uncertainty affects equilibrium outcomes. In this paper we propose one model of fiscal policy uncertainty: an RBC-type model with distortionary taxation and government debt, in which agents act as econometricians and update their beliefs about fiscal policy every period. In our model, agents use past realizations of fiscal variables to learn what actual policy rules in place and thus whether changes in those fiscal variables are temporary (driven by exogenous shocks) or permanent (driven by changes in the parameters of the fiscal policy rules). The task of disentangling permanent from temporary changes in fiscal policy is identified as a major source of fiscal policy uncertainty by Baker et al. (2012). In our model uncertainty about fiscal policy is partly endogenous since the properties of the estimators of the fiscal policy rule coefficients employed by private agents change as the private sector's behavior changes. This behavior occurs because choice variables of the representative private agent enter the fiscal policy rules.We analyze a one-time permanent change in the government spending policy rule and use Monte Carlo simulations of our model to assess how beliefs evolve and how these beliefs affect allocations. Learning leads to substantially different outcomes even though learning is quite fast: there is a substantial temporary spike in volatility under learning that is absent under full information. In addition, there are persistent average differences between the outcomes under learning and under full information. We show that investment plays a big role in creating the average differences -temporary differences in investment between the learning and full information environments have long-lasting effects via the capital stock. The uncertainty about government spending induces uncertainty about the steady state of other variables such as GDP and debt, which in turn influences uncertainty about the steady state of other fiscal policy instruments, even though the coefficients of those policy rules are tightly (and correctly) estimated. Thus, even though we only consider changing a small subset of the fiscal policy coefficients, this uncertainty creeps into other fiscal variables. As robustness checks we consider various assumptions about the agents' information set and their preferences as well as an alternative change in fiscal policy. Our qualitative results remain unchanged throughout. What sets our model apart is the way agents form their beliefs about the stance of fiscal policy. Our...

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Reproduction permitted only if source is stated.ISBN 978-3-95729-134-9 (Printversion) Non-technical summary Research QuestionFinancial linkages between savers and borrowers are exposed to agency problems which may arise for several reasons. Imperfect information about an investment project can cause moral hazard behavior of borrowers if lenders do not have sufficient information about them. Our aim is to introduce imperfect information in a contract related to a limited enforcement problem. The way agents process and update new information is key for the optimizing behavior of the individual and hence for aggregate macroeconomic variables. In this paper we ask what the consequences for the business cycle are when agents have to learn about the behavior of banks. ContributionThe idea of our paper is to implement imperfect information into the banking sector of an otherwise standard New-Keynesian model, in which limited enforcement creates an agency problem. In our setting, economic agents learn about the size of changes in the diverting behavior of bankers. Everything else in the economy, i.e. both the structure and the parameter values, is known. Then we contrast the learning approach to full information rational expectations and analyze their respective roles for the business cycle. ResultsFor the period during which agents learn about the economy, the whole economy exhibits higher volatility and different outcome paths for macroeconomic variables compared with rational expectations. In particular, the introduction of imperfect information amplifies the responses of variables as the leverage ratio in the economy is higher for a longer period. Output is also higher due to a boost in investment before it undershoots the rational expectations benchmark outcomes. This goes hand in hand with an increase in uncertainty and higher volatility of all macro-variables. Compared with rational expectations output, investment and the leverage ratio display an increase in their respective volatility of between 1% and 8%. Output becomes even slightly more persistent in the learning case. Nichttechnische Zusammenfassung AbstractIn this paper, we discuss the consequences of imperfect information about financial frictions on the macroeconomy. We rely on a New Keynesian DSGE model with a banking sector in which we introduce imperfect information about a limited enforcement problem. Bank managers divert resources and can increase the share of diversion. This can only be observed imperfectly by depositors. The ensuing imperfect information generates a higher volatility of the business cycle. Spillovers from the financial sector to the real economy are higher and shocks in general are considerably amplified in the transition period until agents' learning is complete. Volatility and second-order moments also display an amplification under the learning setup compared with the rational expectations framework.

Research Question Together with the inception of quantitative easing as an additional monetary policy instrument, a debate has begun about how strongly unconventional monetary policy measures interact with fiscal policy. In this paper, we examine the classical monetary-fiscal interaction (along the lines of Leeper (1991, Journal of Monetary Economics)) if the central bank conducts large-scale government bond purchases. In particular, we ask how inflation reacts after an increase in bond purchases especially for the case of fiscal dominance, ie. a situation where monetary policy does not (or cannot) stabilize inflation and fiscal policy does not stabilize government indebtedness. Contribution

Reproduction permitted only if source is stated. ISBN 978-3-86558-991-0 (Internetversion) Non-technical summaryPartly motivated by the recent financial crisis and the subsequent recession, economists have recently placed greater emphasis on identifying uncertainty about monetary and fiscal policy as a potentially important factor determining economic outcomes, as highlighted by Baker, Bloom, and Davis (2012). Natural questions seem to be how this uncertainty arises, what the exact transmission mechanism is and how this uncertainty affects equilibrium outcomes. In this paper we propose one model of fiscal policy uncertainty: an RBC-type model with distortionary taxation and government debt, in which agents act as econometricians and update their beliefs about fiscal policy every period. In our model, agents use past realizations of fiscal variables to learn what actual policy rules in place and thus whether changes in those fiscal variables are temporary (driven by exogenous shocks) or permanent (driven by changes in the parameters of the fiscal policy rules). The task of disentangling permanent from temporary changes in fiscal policy is identified as a major source of fiscal policy uncertainty by Baker et al. (2012). In our model uncertainty about fiscal policy is partly endogenous since the properties of the estimators of the fiscal policy rule coefficients employed by private agents change as the private sector's behavior changes. This behavior occurs because choice variables of the representative private agent enter the fiscal policy rules.We analyze a one-time permanent change in the government spending policy rule and use Monte Carlo simulations of our model to assess how beliefs evolve and how these beliefs affect allocations. Learning leads to substantially different outcomes even though learning is quite fast: there is a substantial temporary spike in volatility under learning that is absent under full information. In addition, there are persistent average differences between the outcomes under learning and under full information. We show that investment plays a big role in creating the average differences -temporary differences in investment between the learning and full information environments have long-lasting effects via the capital stock. The uncertainty about government spending induces uncertainty about the steady state of other variables such as GDP and debt, which in turn influences uncertainty about the steady state of other fiscal policy instruments, even though the coefficients of those policy rules are tightly (and correctly) estimated. Thus, even though we only consider changing a small subset of the fiscal policy coefficients, this uncertainty creeps into other fiscal variables. As robustness checks we consider various assumptions about the agents' information set and their preferences as well as an alternative change in fiscal policy. Our qualitative results remain unchanged throughout. What sets our model apart is the way agents form their beliefs about the stance of fiscal policy. Our...