Inflation and the fiscal limit
By: Troy Davig, Eric M. Leeper, Todd B. Walker
Contributors: Leeper, Eric Michael; Walker, Todd B. (Todd Bruce); National Bureau of Economic Research
Series: NBER working paper series -- working paper 16495; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16495.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "We 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.  We 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.  One policy option that stabilizes debt is a passive monetary policy, which generates a burst of inflation that devalues the existing nominal debt stock.  The probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target.  The distribution of outcomes for the path of future inflation has a fat right tail, revealing that only a small set of outcomes imply dire inflationary scenarios.  Avoiding these scenarios, however, requires the fiscal authority to renege on some share of future promised transfers"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/11/2011.

Includes bibliographical references.

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Mode of access: World Wide Web.