Odd behavior and effective budget constraints
When governments sell a lot of bonds, people think the government is sooner or later going to soak up these bonds with taxes, and do not spend.
That is John Cochrane in his recent post on the "fiscal theory of the price level". I don't know about you, but I'd have to look up how many bonds the government has recently sold, if this represents an increase or decrease relative to the past rate of increase or decrease, and then calculate what that should mean in terms of my spending. I have done this exactly never times.
Yes, there is Friedman's "as if" metaphor, but then that means Cochrane's statement should just be treated as a metaphor. However, it is used to formulate a mathematical model in terms of agent expectations. These aren't expectations, but metaphorical expectations.
A information equilibrium argument is more plausible:
When governments sell a lot of bonds, the state space of individual consumption changes such that individual agents do not on average move to states of increased consumption in future time periods.
This is at least consistent with the empirical observation that people don't behave the way Cochrane says -- they could just behave "as if" they expect future taxes.
However, the state space description above is equivalent to an intertemporal budget constraint, which is only a valid assumption near an equilibrium. Therefore we shouldn't act "as if" Cochrane's statement is true in general. Which makes sense of our intuition that Cochrane's description of human behavior is very odd.
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PS Blogging via mobile. Will add links later.
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Update +6 hours
Updated and added links.