On the behavior of fiscal policy with costly expectations

Martin Guzman
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Martin Guzman: Department of Economics, Brown University

Económica, 2009, vol. LV, 29-44

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.

Keywords: Optimal fiscal policy; cycles; agent-based economics. (search for similar items in EconPapers)
JEL-codes: E32 E62 H30 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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