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Government debt, output, and asymmetric information

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  • D. C. Betts
  • Joseph H. Haslag

Abstract

Recent explanation of monetary policy and its effect have centered upon a non-cooperative game involving the monetary authority and the private sector. Notably absent from the discussion of asymmetric information and its impact on decision making is fiscal policy. This note examines a simple model where the fiscal authority determines the optimal ratio of permanent to total government debt based on explicit optimizing behavior. Deficit financing can have short-run effects because of uncertainty concerning future fiscal policy. However, in the long run, changes in net private sector wealth due to government financing policies do not affect private sector behavior.

Suggested Citation

  • D. C. Betts & Joseph H. Haslag, 1987. "Government debt, output, and asymmetric information," Working Papers 1987-003, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1987-003
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    References listed on IDEAS

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    1. Hirschhorn, Eric, 1984. "Rational expectations and the effects of government debt," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 55-70, July.
    2. Joseph E. Stiglitz, 1988. "On the Relevance or Irrelevance of Public Financial Policy," International Economic Association Series, in: Kenneth J. Arrow & Michael J. Boskin (ed.), The Economics of Public Debt, chapter 2, pages 41-76, Palgrave Macmillan.
    3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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