Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70650
Authors: 
Karantounias, Anastasios G.
Year of Publication: 
2012
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2009-29a
Abstract: 
This paper studies the design of optimal fiscal policy when a government that fully trusts the probability model of government expenditures faces a fearful public that forms pessimistic expectations. We identify two forces that shape our results. On the one hand, the government has an incentive to concentrate tax distortions on events that it considers unlikely relative to the pessimistic public. On the other hand, the endogeneity of the public’s expectations gives rise to a novel motive for expectation management that aims towards the manipulation of equilibrium prices of government debt in a favorable way. These motives typically act in opposite directions and induce persistence to the optimal allocation and the tax rate.
Subjects: 
fiscal policy
misspecification
robustness
debt
martingale
taxes
JEL: 
D80
E62
H21
H63
Document Type: 
Working Paper

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