LEARNING AND THE SIZE OF THE GOVERNMENT SPENDING MULTIPLIER

Ewoud Quaghebeur

Macroeconomic Dynamics, 2019, vol. 23, issue 8, 3189-3224

Abstract: This paper examines the government spending multiplier when economic agents combine adaptive learning and knowledge about future fiscal policy to form their expectations. The analysis shows that the effects of a government spending shock substantially change when the rational expectations hypothesis is replaced by this learning mechanism. In contrast to the dynamics under rational expectations, a government spending shock in a small-scale new Keynesian DSGE model with learning crowds in private consumption and is associated with a positive comovement between real wages and hours worked. In the baseline calibration, the output multiplier under learning is above one and about twice as large as under rational expectations.

Date: 2019
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Working Paper: Learning and the Size of the Government Spending Multiplier (2013)
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