Rational expectations and the instability of bond-financing |
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Authors: | William M. Scarth |
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Affiliation: | McMaster University, Hamilton, Ont. Canada L8S 4M4 |
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Abstract: | Models involving the government budget constraint are generally unstable when deficits are bond-financed; while rational expectations models involve restrictions which preclude unstable solutions. This note integrates these approaches and shows that rational expectations is inconsistent with convergence when deficits are bond-financed. |
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