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LEARNING AND THE SIZE OF THE GOVERNMENT SPENDING MULTIPLIER

Published online by Cambridge University Press:  13 June 2018

Ewoud Quaghebeur
Affiliation:
Ghent University
Corresponding
E-mail address:

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.

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Articles
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Copyright © Cambridge University Press 2018 

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Footnotes

I would like to acknowledge the academic, financial, and technical support of Ghent University. I wish to express my very special thanks to Freddy Heylen for his support and useful comments throughout the development of this paper. I would also like to thank Brecht Boone, Tim Buyse, Gerdie Everaert, Punnoose Jacob, Gert Peersman, Céline Poilly, Raf Wouters, and two anonymous referees for helpful comments.

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