Do Fiscal Variables Affect Fiscal Expectations? Experiments With Real World And Lab Data

The authors generate observable expectations about fiscal variables through laboratory experiments using real world data from several European countries as stimuli. They compare a VAR model of expectations for data which is presented in a fiscal frame with one for neutrally presented data. They 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. They tie the VAR analysis to specific models of forming expectations. They find that agents' expectations are neither consistent with rational nor with purely adaptive expectations but, instead, follow an augmented-adaptive scheme.