Essays in Macroeconomics and Taxation

In these essays, I explore the business cycle implications of changes in expectations about the course of future fiscal policy. Some conventional models of fiscal policy assume that tax rates and government consumption follow an exogenous stochastic process, so that expectations of future policy are determined by current policy only. I consider two ways in which expectations about future policy change even when current policy does not. First, I construct a DSGE model where agents receive news about changes in future policy every period, and compare it to an economy where agents receive no information whatsoever but is identical in every other detail. Comparison of the models' impulse-response functions show that, in the economy with news, model variables move---and can even trigger a recession---before the policy change takes place. Second, I construct a DSGE model where agents' expectations about future policy are derived from a simple tax rule which ties future tax rates to the current deficit and debt; I compare this economy to a similar economy which lacks these tax rules. Analysis of the impulse-response functions shows that the qualitative response is the same in both economies; however, the quantitative response is amplified in the economy with tax rules. This result is robust to the choice of policy variable used. I conclude that deviations from the traditional strategies for including fiscal policy in DSGE models can create drastically different implications for the business cycle.