Some Even More Unpleasant Monetarist Arithmetic

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Some Even More Unpleasant Monetarist Arithmetic

Author Info

Bruce Smith
J. Bhattacharya
Mark Guzman

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Abstract

Does monetizing a deficit always result in a higher rate of inflation than bond financing the same deficit? T. J. Sargent and N. Wallace (1981) produced conditions under which the answer was negative ('unpleasant monetarist arithmetic'). Subsequent authors have challenged the empirical validity of these conditions. The authors develop a model similar to that of Sargent and Wallace and modify it to allow for financial intermediation. In the presence of reserve requirements, unpleasant arithmetic arises even when the real rate of growth exceeds the real return on bonds. Moreover, under empirically plausible restrictions, there exists a unique equilibrium; no Laffer curve considerations arise.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 31 (1998)
Issue (Month): 3 (August)
Pages: 596-623
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Handle: RePEc:cje:issued:v:31:y:1998:i:3:p:596-623

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Paper
- Bhattacharya, Joydeep & Guzman, M. & Smith, B.D., 2002. "Some Even More Unpleasant Monetarist Arithmetic," Staff General Research Papers 5084, Iowa State University, Department of Economics.

Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Mark G. Guzman, 2007. "The Impact of Paying Interest on Reserves in the Presence of Government Deficit Financing," Money Macro and Finance (MMF) Research Group Conference 2006 92, Money Macro and Finance Research Group. [Downloadable!]
Marco Espinosa-Vega & Steven Russell, 2001. "Stability of steady states in a model of pleasant monetarist arithmetic," Working Paper 2001-20, Federal Reserve Bank of Atlanta. [Downloadable!]
Stacey L. Schreft & Bruce D. Smith, 2001. "The conduct of monetary policy with a shrinking stock of government debt," Research Working Paper RWP 01-09, Federal Reserve Bank of Kansas City. [Downloadable!]
Other versions:
- Stacey L. Schreft & Bruce D. Smith, 2002. "The conduct of monetary policy with a shrinking stock of government debt," Proceedings, Federal Reserve Bank of Cleveland, pages 848-886.
- Schreft, Stacey L & Smith, Bruce D, 2002. "The Conduct of Monetary Policy with a Shrinking Stock of Government Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 848-82, August.
Joydeep Bhattacharya & Joseph H. Haslag, 1999. "Monetary policy arithmetic: some recent contributions," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 26-36. [Downloadable!]
Other versions:
- Bhattacharya, Joydeep & Haslag, J., 2003. "Monetary Policy Arithmetic: Some Recent Contributions," Staff General Research Papers 10388, Iowa State University, Department of Economics.
Stacey L. Schreft & Bruce D. Smith, 2003. "The social value of risk-free government debt," Research Working Paper RWP 03-02, Federal Reserve Bank of Kansas City. [Downloadable!]
Other versions:
- Stacey Schreft & Bruce Smith, 2008. "The social value of risk-free government debt," Annals of Finance, Springer, vol. 4(2), pages 131-155, March. [Downloadable!] (restricted)
Mark G. Guzman, 2004. "The impact of paying interest on reserves in the presence of government deficit financing," Working Papers 04-06, Federal Reserve Bank of Dallas. [Downloadable!]
Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25. [Downloadable!]

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