We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt only to finance capital items. Many national governments followed this rule in the 18th and 19th centuries and most US states do so today. Despite its simplicity, this 1800s financing rule provides excellent incentives for majorities to choose an efficient mix of public goods in an economy with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case of our model where the demographics make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data and use our findings to offer a tentative explanation for why the 1800s rule was abandoned by the Federal government but not by state governments in the twentieth century

We use a Bayesian Markov Chain Monte Carlo algorithm to estimate a model that allows temporary gaps between a true expectational Phillips curve and the monetary authority's approximating nonexpectational Phillips curve.A dynamic programming problem implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves.Our estimates attribute the rise and fall of post WWII inflation in the US to an intricate interaction between the monetary authority's beliefs and economic shocks.Shocks in the 1970s altered the monetary authority's estimates and made it misperceive the tradeoff between inflation and unemployment.That caused a sharp rise in inflation in the 1970s.Our estimates say that policymakers updated their beliefs continuously.By the 1980s,

We use a Bayesian Markov Chain Monte Carlo algorithm to estimate the parameters of a “true” data-generating mechanism and those of a sequence of approximating models that a monetary authority uses to guide its decisions. Gaps between a true expectational Phillips curve and the monetary authority's approximating nonexpectational Phillips curve models unleash inflation that a monetary authority that knows the true model would avoid. A sequence of dynamic programming problems implies that the monetary authority's inflation target evolves as its estimated Phillips curve moves. Our estimates attribute the rise and fall of post-WWII inflation in the United States to an intricate interaction between the monetary authority's beliefs and economic shocks. Shocks in the 1970s made the monetary authority perceive a tradeoff between inflation and unemployment which ignited big inflation. The monetary authority's beliefs about the Phillips curve changed in ways that account for former Federal Reserve Chairman Paul Volcker's conquest of U.S. inflation.