Economic Modeling White Papers
Public Trust and Government Betrayal
Overview Government policy in developed countries is boring. It is relatively stable and predictable, and, for the most part (at least relative to less developed countries), promises made are promises kept. Governments keep their promises despite the fact that policymakers face a well-known time-consistency problem. That is, it is seldom in the short-run best interest of a government to keep capital taxes low, honor its debt obligations, or inflate the currency only by the expected amount. Much of the theory on credible government policy concerns itself precisely with accounting for this ability of governments to make and keep promises. In trigger models (such as in Chari and Kehoe 1 990), good outcomes correspond to a particular subset of equilibria of a game with multiple equilibria. In these good equilibria, households trust the government and the government does not betray this trust because a deviation by the government causes a reversion to a worse equilibrium. With an infinite period model and suciently little discounting, such a threat induces the government not to deviate.
| Publisher | Federal Reserve Bank of Minneapolis | File Format | PDF, requires Acrobat Rdr 5 |
|---|---|---|---|
| Date Published | January 2001 | Downloads | 3 |
| Format | White Papers | ||
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