The paper examines the role of fiscal and monetary policy on the dynamics of monetary

expansion in a macroeconomy. Its microeconomic structure defined by producers with

neoclassical production functions, heterogeneous OLG consumers, and a stationary fiscal

and monetary policy induces a consistent dynamic closed macroeconomic model of the

AS-AD type. Existence and uniqueness of a temporary competitive monetary equilibrium

are shown in a two-market economy (determining prices, wages, output, and employment)

under a standard set of neoclassical conditions on production, consumer preferences, fiscal

and monetary parameters. Comparative statics on prices, wages, and allocations for all

levels of the state variables: money balances, debt, and expectations are shown.

The dynamic development of temporary equilibria is defined by orbits of a dynamical

system generated by three mappings of the one-step (recursive) time change, one for each

state variable. The paper defines and describes explicitly the forecasting rules for prices

as functions (so-called perfect predictors) which induce perfect foresight along orbits of

the economy. It establishes sufficient conditions for their existence and uniqueness and

provides a constructive characterization of perfect predictors for the AS-AD economy.

Given existence of a globally perfect predictor, perfect foresight holds along all orbits of

the economy. The results show that constant intertemporal allocations are uniquely gener-

ated by orbits of balanced expansion of both money balances and public debt. Generically,

depending on parameters, there exist two or no balanced paths while stationary equilibria

with zero inflation exist only on a small (non-open) set of parameters.

For a benchmark case (defined by isoelastic utility and production functions) perfect

foresight dynamics exist globally and are monotonic (no cycles). There exist at most

two balanced paths one of which is always unstable. Their existence and stability are

influenced in a decisive way by fiscal and monetary parameters determining steady state

inflation rates, allocations, as well as bounds for sustainable debt-to-GDP ratios.