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The literature has recently focused on the role of constitutional limitations on public sector deficits and debt after the introduction of the fiscal `convergence criteria' in the Maastricht plan for the European Monetary Union, which also sets strict limitations on the ability of Central Banks to finance public expenditures through seigniorage. In discussion paper No 1310, George Evans and Research Fellows Seppo Honkapohja and Ramon Marimon consider the implications of a (credible) constraint on public deficits financed through seigniorage for the dynamics of inflation. Their model is based on the context of an overlapping generations economy where the deficit is constrained to be less than a given fraction of intergenerational savings. Even if there may be multiplicity of steady-state equilibria, the authors show that, with such a constraint, the dynamics with adaptive learning are globally convergent to a set of equilibria satisfying a local stability condition. They allow for heterogeneity of agents' learning rules and look at the role of some basic behavioural assumptions, such as a certain degree of random ε-precautionary savings and inertia on agents' updating of beliefs. Finally, they also provide experimental evidence on the effect of public expenditure constraints on the stability of equilibria. Convergence in Monetary Inflation Models with heterogeneous |