| Sumario: | The output and employment effects of bond finance depend critically on the assumption that government bonds are regarded by the public as net wealth. This paper analyzes the possibility that debt illusion can exist because of uncertainty about true economic opportunities; there is a learning problem. In some cases, traditional wealth effects can be rationalized in terms of rational short run learning behavior. In other cases, the same general considerations may lead to responses that are opposite to those usually assumed. And policies that have short run effects in the direction conventionally assumed may, in the long run, reverse their direction of impact, thus giving rise to critical timing problems.
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