Expectations and Perceived Causality in Fiscal Policy : An Experimental Analysis Using Real World Data

Abstract

We generate observable expectations about fiscal variables through laboratory experiments using real world data from several European countries as stimuli. We estimate an econometric model of individual expectations for fiscal policy, which nests various theories of expectations{forming and encompasses both micro- and macro-economic lines of research on fiscal policy. Agents' expectations are found neither to be consistent with rational nor with purely adaptive expectations. Expectations follow an augmented-adaptive scheme, which embodies the 'spend and tax hypothesis' on the relationship between taxes and expenditure to a greater extent than in real world data. We relate this findings to current research on the effects of fiscal policy. Methodological implications of the present approach for experiments in macroeconomics are also discussed