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On the behavior of fiscal policy with costly expectations

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  • Martin Guzman

    (Department of Economics, Brown University)

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    Abstract

    This paper extends the Talvi and Végh (2005) model on the behavior of fiscal policy, introducing agent-based issues. Like in Talvi and Végh (2005), the theoretical framework is à la Barro (1979), but rational expectations are costly. The agents can choose between two strategies in forming expectations: buying costly rational expectations or freely following the trend. Unlike Talvi and Végh (2005), I show that procyclicality of fiscal policy is not necessarily the government's optimal behavior.

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    File URL: http://www.depeco.econo.unlp.edu.ar/economica/ing/resumen-articulo.php?param=119¶m2=606
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    Bibliographic Info

    Article provided by Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata in its journal Económica.

    Volume (Year): LV (2009)
    Issue (Month): (January-December)
    Pages: 29-44

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    Handle: RePEc:lap:journl:566

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    Related research

    Keywords: Optimal fiscal policy; cycles; agent-based economics.;

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    1. repec:att:wimass:9530 is not listed on IDEAS
    2. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
    3. Alberto Alesina & Guido Tabellini, 2005. "Why Is Fiscal Policy Often Procyclical?," Working Papers 297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    5. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 156-190, October.
    6. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, Econometric Society, vol. 65(5), pages 1059-1096, September.
    7. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, Elsevier, vol. 38(2), pages 235-269, February.
    8. Huang, Chao-Hsi & Lin, Kenneth S., 1993. "Deficits, government expenditures, and tax smoothing in the United States: 1929-1988," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(3), pages 317-339, June.
    9. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults," IMF Working Papers 02/149, International Monetary Fund.
    10. Riccardo Fiorito, 1997. "Stylized Facts of Government Finance in the G-7," IMF Working Papers 97/142, International Monetary Fund.
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