REAL-TIME PARAMETERIZED EXPECTATIONS AND THE EFFECTS OF GOVERNMENT SPENDING

Brecht Boone and Ewoud Quaghebeur

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: In this paper, we explore the effects of government spending in the real business cycle model where agents use a learning mechanism to form expectations. In contrast to most of the learning literature, we study learning behaviour in the original non-linear model. Following the learning interpretation of the parameterized expect- ations method, agents’ forecast rules are approximations of the conditional expectations appearing in the Euler equation. We show that variation in agents’ beliefs about the coefficients of these rules, generates time variation in the transmission of government spending shocks to the economy. Hence, our modelling approach provides an endogenous mechanism for time-varying government spending multipliers in the standard real business cycle model.

Keywords: Non-linear learning; Parameterized expectations; Fiscal policy; Time-varying multipliers (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E62 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2017-06
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:17/939

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