Assessing fiscal sustainability – i.e. considering whether or not a country can maintain its current fiscal policies without running into solvency problems and possible default – requires projections on a government's future revenue stream, expenditures and contingent liabilities within a...

This paper first documents the increase in the time lag with which laborinput reacts to output fluctuations ("the labor adjustment lag") that is visi-ble in US data since the mid-1980s. We show that a lagged labor adjustmentresponse is optimal in a setting where there is uncertainty about the...