Modeling the Effects of Fiscal Policy Imbalances: How Much Does Myopia Matter?

Macroeconomic forecasters are confronted with two difficult and related questions: how do people form expectations about future government policy, and what is the sensitivity of private investment and saving to government spending and debt? The analysis of this paper suggests simple myopic forecasting rules for the components of future consumption lead to savings rules that are fairly insensitive to even very high levels of government debt. Furthermore, these expectations prove to be close to rational in that predicted growth rates are fairly close to realized growth rates.