Servicing the Public Debt: The Role of Expectations.

Abstract

The author studies models in which debt repudiation, openly or through inflation, is possible. The government maximizes the utility of the representative individual, and the author focuses on n o-precommitment equilibria of the Barro-Gordon type. He shows cases i n which the existence of government bonds generate multiple perfect-f oresight equilibria. However, price indexation and/or interest-rate c eilings are shown to be possible solutions of the equilibrium multipl icity problem. Copyright 1988 by American Economic Association.