On the behavior of fiscal policy with costly expectations
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.
Volume (Year): LV (2009)
Issue (Month): (January-December)
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"Why is fiscal policy often procyclical?,"
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2090, Harvard - Institute of Economic Research.
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