Stabilization programs in open economies typically consist of two stages. In the first stage the rate of currency devaluation is reduced, but the fiscal adjustment does not eliminate the fiscal deficit which causes growth of debt and loss of reserves, making a future policy change necessary....

Stabilization programs in open economies typically consist of two stages. In the first stage, the rate of currency devaluation is reduced, but the fiscal adjustment do es not eliminate the fiscal deficit that causes growth of debt and lo ss of reserves, making a future policy change necessary....

Budget deficits implying an unbounded present value of government debt are infeasible and, hence, induce expectations of a future policy change. The authors study how expectations of a policy switch, whose timing or mix between expenditure cuts, tax increases, or increases in money growth rates...

We consider a model in which the level of taxes and seignorage are too low to finance government expenditures and debt service. Government debt will therefore grow without bound, implying the eventual need to change policy. Starting with utility maximization, we analyze the effect of the...