Managing pessimistic expectations and fiscal policy

• 成果类型: Article
• 署名作者: Karantounias, Anastasios G.
• 署名单位: Federal Reserve System - USA; Federal Reserve Bank - Atlanta
• 刊物名称: THEORETICAL ECONOMICS
• ISSN/ISSBN: 1933-6837
• DOI: 10.3982/TE899
• 发表日期: 2013-01-01
• 页码: 193-231
• 关键词: Fiscal policy; misspecification; Robustness; taxes; debt; martingale

摘要

This paper studies the design of optimal fiscal policy when a government that fully trusts the probability model of government expenditures faces a fearful public that forms pessimistic expectations. We identify two forces that shape our results. On the one hand, the government has an incentive to concentrate tax distortions on events that it considers unlikely relative to the pessimistic public. On the other hand, the endogeneity of the public's expectations gives rise to a novel motive for expectation management that aims toward the manipulation of equilibrium prices of government debt in a favorable way. These motives typically act in opposite directions and induce persistence to the optimal allocation and the tax rate.