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Inflation And The Fiscal Limit

The authors use a rational expectations framework to assess the implications of rising debt in an environment with a "Fiscal limit." The fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes, so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt. They give households a joint probability distribution over the various policy adjustments that may occur, as well as over the timing of when the fiscal limit is hit.

Provided by: National Bureau of Economic Research Topic: Project Management Date Added: Oct 2010 Format: PDF

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