Doubts about the model and optimal policy

Anastasios Karantounias

No 423, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: This paper analyzes optimal policy in setups where both the policymaker and the private sector have doubts about the probability model of uncertainty and form endogenous worstcase beliefs. There are two forces that shape optimal policy results: a) the manipulation of the endogenous beliefs of the private sector so that the forward-looking constraints that the policymaker is facing are relaxed, b) the discrepancy (if any) in pessimistic beliefs between a paternalistic policymaker and the private sector, which captures ultimately differences in welfare evaluation. I illustrate the methodology in an optimal fiscal policy problem and show that manipulation of beliefs materializes as an effort to make government debt cheaper through the endogenous beliefs of the household. This force may lead to either mitigation or amplification of the household's pessimism, depending on the problem's parameters. The policymaker's relative pessimism determines whether paternalism reinforces or opposes the price manipulation incentives.

JEL-codes: D80 E52 E61 E62 H21 H63 (search for similar items in EconPapers)
Pages: 89 pages
Date: 2023-04
New Economics Papers: this item is included in nep-des and nep-mac
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https://repec.som.surrey.ac.uk/2023/DP04-23.pdf (application/pdf)

Related works:
Journal Article: Doubts about the model and optimal policy (2023)
Working Paper: Doubts about the model and optimal policy (2023)
Working Paper: Doubts about the Model and Optimal Policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0423

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