Old Wine in a New Bottle: What Does Anticipated Economic Policy Do?

Abstract

The aim of this study is to test the policy ineffectiveness proposition of
rational expectations approach. According to this hypothesis, economic
policies anticipated by economic units do not have any effect on business
cycle; on the contrary, only the unanticipated policy would affect real output.
With this aspect of it, the hypothesis becomes an empirical issue and an
outcome that should be tested at least in the context of developing countries.
To this end, the model in this study is developed within the public sector
budget constraint based on that monetary and fiscal policies cannot be
approached separately. The analytical solution of the model shows that both
anticipated and unanticipated monetary and fiscal policies have effect on
real output. Thus, the subject requires empirical proof; in other words, the
theoretical finding should be supported empirically. According to estimation
results, the policy ineffectiveness proposition of New Classical approach has
not gained validity for the case of Turkey. The model tested with the data
obtained from Turkey showed that both anticipated and unanticipated policy
changes have influence on real output.