Do fiscal variables affect fiscal expectations? Experiments with real world and lab data

Abstract

a b s t r a c tWe generate observable expectations about fiscal variables through laboratory experiments using real world data from several European countries as stimuli. We compare a VAR model of expectations for data that is presented in a fiscal frame with one for neutrally presented data. We test the validity of the setup and find that participants understand the meaning of the fiscal variables, but also that their ability to perceive the correct characteristics of fiscal policy is limited. Expectations are consistent neither with rational nor with purely adaptive expectations, but instead follow an augmented-adaptive scheme.

As If or What? - Expectations and Optimization in a Simple Macroeconomic Environment

“…We test maximization in an objective version, where the true underlying model is the benchmark, and a subjective version, which rests on the beliefs or expectations of subjects. As we observe how subjects form expectations in a macroeconomic setting, our work also relates to several recent experimental studies on expectation formation (Adam 2007, Bernasconi and Kirchkamp 2000, Bernasconi et al, 2004, Heemeijer et al 2007, Hommes et al 2005a,b, 2007, forthcoming, Sonnemans et al 2004, 2005. While the analysis of subjective expectations and their formation process is clearly important for macroeconomics, it is not the main objective of this paper.…”

1. Macroeconomics: A Survey of Laboratory Research

“…This literature imagines that agents are boundedly rational in the sense that they do not initially know the model (data generating process) and behave more as econometricians, using possibly miss-specified model specifications for their forecasting rules which they update in real-time as new data become available. In addition to the work of Sunder (1993, 1994), this real-time, adaptive expectations approach has been explored experimentally using the learning to forecast design by Bernasconi et al (2006), Hey (1994), Van Huyck et al (1994, Kelley and Friedman (2002), Hommes et al (2005Hommes et al ( , 2007, Heemeijer et al (2009) and Bao et al (2012Bao et al ( , 2013. The use of the learning to forecast methodology has become particularly important in assessing policy predictions using the expectations-based New Keynesian model of the monetary transmission mechanism in experimental studies by Adam (2007), Pfajfar and Zakelj (2013), Assenza et al (2013) and Petersen et al (2012), as will be discussed later in section 5.3 Hommes et al (2007) provides a good representative example of this literature.…”

“…Having considered monetary policy, we turn finally to experimental analyses of fiscal and tax policies. Bernasconi et al (2006) In most treatments they were told the name of each historical series, e.g. "tax revenue."…”

The Importance of Time-Series Extrapolation for Macroeconomic Expectations

“…In theory, there is no dispute that rational expectation is the most compelling model for the formation of economic expectations. Numerous econometric and experimental studies (e.g., Adam, 2007;Baillie et al, 1983;Bernasconi et al, 2009;Cargill, 1976;Dwyer et al, 1993;Friedman, 1980;Hey, 1994;Hommes et al, 2005Hommes et al, , 2008Mankiw et al, 2003;McNees, 1978;Pyle, 1972;Roos, 2005;Schmalensee, 1976;Souleles, 2004;Thomas, 1999;Turnovski and Wachter, 1972;Wallis, 1980;Zarnowitz, 1985) tested the Rational Expectations Hypothesis (REH). In most cases, the evidence obtained in these papers does not support rational expectations.…”