Achieving the Best Fiscal Outcome: What Does the Government Need to Know?

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.