We develop a rational expectations framework to study the consequences of alternative means to resolve the "unfunded liabilities'' problem---unsustainable exponential growth in federal Social Security, Medicare, and Medicaid spending with no plan to finance it. Resolution requires specifying a...

Even allowing for substantial uncertainty regarding projections, current US fiscal policies are almost certainly unsustainable. Therefore, policymakers must decide when and in what ways to change policies. Changing policies sooner rather than later would put debt on a lower trajectory and...

We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of trend inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates...

The Covid pandemic disrupted supply chains and labor markets, with heterogeneous effects on demand and supply across industries. Meanwhile governments responded with unprecedented stimulus packages, and inflation increased to its highest values in 40 years. In this paper I investigate the...

The recently-developed fiscal theory of price level determination contends that there is an important class of policy rules in which there exists a unique rational expectations solution that shows the price level to be dependent upon fiscal policy and independent of monetary variables. The...

Sargent and Wallace (S-W) show that, even when inflation is prima facie a strictly monetary phenomenon -- prices are flexible, markets clear and velocity is constant -- inflation is, in the long run, a fiscal phenomenon. This follows from the government budget constraint and the existence of an...

The setup of the paper is as follows: Section I presents a fairly standard, small deterministic macromodel with a number of classical features. All markets clear instantaneously, there is no money illusion, and perfect foresight rules. The effects of monetary, financial, and fiscal policies in...

We address the question of how sensitive is the power of fiscal policy in the ZLB to the assumption of rational expectations. We do so through the lens of a standard NK model in which people are level-k thinkers. Our analysis weakens the case for using government spending to stabilize the...

The fiscal theory states that inflation adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines the path of expected inflation, while news about the...

We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these...