Recent empirical evidence from vector autoregressions (VARs) suggests that public spending shocks increase (crowd in) private consumption. Standard general equilibrium models predict the opposite. We show that a standard real business cycle (RBC) model in which public spending is chosen...

We instillate rational cognition and learning in "seemingly riskless" choices and judgments. Preferences and possibilities are given in a stochastic sense and based on revisable expectations. The theory predicts experimental preference reversals and passes a sharp econometric test of the status...