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Rational Expectations and Inflation$
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Thomas J. Sargent

Print publication date: 2013

Print ISBN-13: 9780691158709

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691158709.001.0001

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United States Then, Europe Now

United States Then, Europe Now

Chapter:
(p.297) 10 United States Then, Europe Now
Source:
Rational Expectations and Inflation
Author(s):

Thomas J. Sargent

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691158709.003.0010

This chapter shows that predicaments facing the European Union today are reminiscent of constitutional decisions the United States faced not once, but twice. It begins with a simple expected present value model for government debt and explains how Hansen and Sargent (1980) used rational expectations econometrics to render this model operational. It then presents a case study that illustrates how the constitutions of the United States have influenced the government net-of-interest surplus process and therefore the value of government debt. Drawing on the unpleasant arithmetic of Sargent and Wallace (1981), the chapter argues that a responsible fiscal policy makes it easy for a monetary authority to sustain low inflation, whereas a profligate fiscal policy has the opposite effect.

Keywords:   inflation, European Union, United States, government debt, rational expectations, econometrics, unpleasant arithmetic, fiscal policy, monetary authority

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