Debt, Policy Uncertainty and Expectations Stabilization
AbstractThis 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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Bibliographic InfoPaper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-20.
Length: 38 pages
Date of creation: Jul 2010
Date of revision:
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Other versions of this item:
- Stefano Eusepi & Bruce Preston, 2012. "Debt, Policy Uncertainty, And Expectations Stabilization," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 10(4), pages 860-886, 08.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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