Perceived Budget Constraint of the Government 

(with Dmitriy Sergeyev)

Abstract: We provide direct evidence on how the public expects the government to satisfy its intertemporal budget constraint. In a representative survey of U.S. households, respondents expect only 45% of government debt to be financed by future primary surpluses and 23% to be rolled over indefinitely without ever generating surpluses, as if sustained by a bubble. Experts perceive an even larger bubble (37%). Beliefs respond to fundamentals: at a debt-to-GDP ratio of 150%, the perceived bubble shrinks to 15%. A New Keynesian model calibrated to these beliefs implies a 13% larger government spending multiplier.