Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia
ABSTRACTS
This paper examines the operation of fiscal policy under incomplete
information when the central bank sets the stance of monetary policy so
as to achieve a zero inflation target. The fiscal authority is assumed
to aim to achieve a target level for output and a zero level of public
debt. The best fiscal policy setting arises under full information and
is one where output atains its full employment level and public debt is
driven to zero. Deviations from full infomration can lead to a considerable
divergence from the best fiscal setting involving substantial levels of
public sector indebtedness. The result ssuggest that a government shoudl
invest avilable resources determining what outcomes are achievable and
what outcomes are not. Then it should focus all its energies on trying
to deliver achievable outcomes. The benefits from such a strategy can be
substantial.
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