‘‘Unfundedliabilities’’anduncertainfiscalfinancing$

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.