Debt, Policy Uncertainty and Expectations Stabilization

Stefano Eusepi and Bruce Preston

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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 communicating about monetary and fiscal policy enlarges the set of policies consistent with stability. However, absent anchored fiscal 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.

JEL-codes: D83 D84 E52 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-07
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... epi_preston_2010.pdf (application/pdf)

Related works:
Journal Article: DEBT, POLICY UNCERTAINTY, AND EXPECTATIONS STABILIZATION (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2010-20

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().