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Debt, Policy Uncertainty, And Expectations Stabilization

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  • Stefano Eusepi
  • Bruce Preston

Abstract

This paper develops a model of policy regime uncertainty and its consequences for stabilizing expectations. Because of learning dynamics, uncertainty about monetary and fiscal policy is shown to restrict, relative to a rational expectations analysis, the set of policies consistent with macroeconomic stability. Anchoring expectations by communicat- ing about monetary and scal policy enlarges the set of policies consistent with stability. However, absent anchored scal expectations, the advantages from anchoring monetary expectations are smaller the larger is the average level of indebtedness. Finally, even when expectations are stabilized in the long run, the higher are average debt levels the more persistent will be the effects of disturbances out of rational expectations equilibrium.

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File URL: http://hdl.handle.net/10.1111/j.1542-4774.2012.01072.x
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Bibliographic Info

Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 10 (2012)
Issue (Month): 4 (08)
Pages: 860-886

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Handle: RePEc:bla:jeurec:v:10:y:2012:i:4:p:860-886

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Cited by:
  1. Troy Davig & Eric M. Leeper, 2011. "Temporarily Unstable Government Debt and Inflation," NBER Working Papers 16799, National Bureau of Economic Research, Inc.
  2. Eric M. Leeper & Todd B. Walker, 2011. "Fiscal Limits in Advanced Economies," Economic Papers, The Economic Society of Australia, vol. 30(1), pages 33-47, 03.
  3. Eric M. Leeper, 2010. "Monetary Science, Fiscal Alchemy," NBER Working Papers 16510, National Bureau of Economic Research, Inc.
  4. Eusepi, Stefano & Giannoni, Marc & Preston, Bruce, 2012. "Long-Term Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge," CEPR Discussion Papers 8845, C.E.P.R. Discussion Papers.
  5. Bruce Preston, 2013. "Comment on "Dormant Shocks and Fiscal Virtue"," NBER Chapters, in: NBER Macroeconomics Annual 2013, Volume 28 National Bureau of Economic Research, Inc.
  6. Alexander W. Richter, 2013. "The Fiscal Limit and Non-Ricardian Consumers," Auburn Economics Working Paper Series auwp2013-19, Department of Economics, Auburn University.

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