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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

(p.297) 10 United States Then, Europe Now
Rational Expectations and Inflation

Thomas J. Sargent

Princeton University Press

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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