But, while crude and simplistic, the assumption of rational expectations is a useful and tractable way to capture two fundamental ideas. First, what people think about the future can affect their current decisions. Second, in the face of changing circumstances, people will not forever do the same thing expecting a different outcome, to paraphrase Einstein’s oft-cited definition of insanity.
Higher productivity could also help lengthen the credibility range, the range in which moderate changes in the debt ratio might not lead to adverse changes in relative prices. Among other things, higher productivity could raise the marginal product of capital and make investment in U.S. assets relatively attractive. But even with these favorable developments, the stability conditions discussed above still hold.