Managing expectations and fiscal policy

@inproceedings{Karantounias2009ManagingEA,
  title={Managing expectations and fiscal policy},
  author={Anastasios G. Karantounias and Lars Peter Hansen and Thomas J. Sargent},
  year={2009}
}
This paper studies an optimal fiscal policy problem of Lucas and Stokey (1983) but in a situation in which the representative agent’s distrust of the probability model for government expenditures puts model uncertainty premia into history-contingent prices. This gives rise to a motive for expectation management that is absent within rational expectations and a novel incentive for the planner to smooth the shadow value of the agent’s subjective beliefs in order to manipulate the equilibrium… CONTINUE READING