Year: 2018
Type: article
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 crowdsinprivate 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.
Source: Macroeconomic Dynamics
Author: Ewoud Quaghebeur
Institution: Ghent University
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2233190022