ABSTRACT
How do household expectations change when the government abruptly switches from taxation to bond sales to attempt to finance its large budget deficits? What effect does a prolonged reliance on bond financing have on the long-term credibility of such a deficit financing policy? The present chapter employs macroexperimentation techniques to test the actual behaviour of individual ‘house-holds’ set in an artificial economy that shifts from taxation to a policy of long-term bond financing to meet its fiscal imbalances. The focus of this chapter will be the effects of fiscal policy on household expectations and long-term credibility-the experimental effects of monetary policy on the confidence factors will be presented in the following chapter.
