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Real-Time Parameterized Expectations And The Effects Of Government Spending

Author

Listed:
  • Brecht Boone
  • Ewoud Quaghebeur
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.

Suggested Citation

  • Brecht Boone & Ewoud Quaghebeur, 2017. "Real-Time Parameterized Expectations And The Effects Of Government Spending," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/939, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:17/939
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    References listed on IDEAS

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    More about this item

    Keywords

    Non-linear learning; Parameterized expectations; Fiscal policy; Time-varying multipliers;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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