Abstract :
A rationalexpectationsframeworkisdevelopedtostudytheconsequencesof
alternativemeanstoresolvethe‘‘unfundedliabilities’’problem—unsustainable
exponentialgrowthinfederalSocialSecurity,Medicare,andMedicaidspendingwith
no plantofinanceit.Resolutionrequiresspecifyingaprobabilitydistributionforhow
and whenmonetaryandfiscalpolicieswillchangeastheeconomyevolvesthroughthe
21st century.Beliefsbasedonthatdistributiondeterminetheexistenceofandthe
natureofequilibrium.Weconsiderpoliciesthatinexpectationcombinereachinga
fiscallimit,somedistortingtaxation,modestinflation,andsomerenegingonthe
government’spromisedtransfers.Intheequilibrium,inflation-targetingmonetary
policycannotsuccessfullyanchorexpectedinflation.Expectationaleffectsarealways
present,butneednothavealargeimpactsoninflationandinterestratesintheshort
and mediumruns.