The expectations view on fiscal policy : an experiment using real world data

To understand the effect of fiscal policy on the private sector we have to comprehend how expectations about fiscal variables are formed. However, little is known about the way people form expectations about fiscal variables: no undercutting theory exists, not to say empirical evidence. The problem is that “expectations are unobservable” (Bertola and Drazen [BD93, p.16]). We generate observable expectations using a combination of laboratory experiments and real world data from several European countries. Based upon these observable expectations we develop a model of formation of expectations. We fit real world data and study the effect of fiscal policies. We show that we can study the relationship between private consumption and government consumption.