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Understanding policy in the great recession: Some unpleasant fiscal arithmetic

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  • Cochrane, John H.

Abstract

I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009. I also examine policy alternatives to avoid deflation, and how fiscal pressures might lead to inflation. I conclude that the central bank may be almost powerless to avoid deflation or inflation; that an eventual fiscal inflation can come well before large deficits or monetization are realized, and that it is likely to come with stagnation rather than a boom.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 1 (January)
Pages: 2-30

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:1:p:2-30

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Inflation Deflation Fiscal theory of the price level;

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  1. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," CRSP working papers 478, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Adam Ashcraft & Nicolae Gârleanu & Lasse Heje Pedersen, 2010. "Two Monetary Tools: Interest Rates and Haircuts," NBER Working Papers 16337, National Bureau of Economic Research, Inc.
  3. Darrell Duffie, 2010. "The failure mechanics of dealer banks," BIS Working Papers 301, Bank for International Settlements.
  4. Burnside, C. & Eichenbaum, M. & Rebelo, S., 1998. "Prospective Deficits and the Asian Currency Crisis," RCER Working Papers 458, University of Rochester - Center for Economic Research (RCER).
  5. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2003. "Government Finance in the Wake of Currency Crises," NBER Working Papers 9786, National Bureau of Economic Research, Inc.
  6. Cochrane, John H, 1992. "Explaining the Variance of Price-Dividend Ratios," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(2), pages 243-80.
  7. Piergallini, Alessandro & Rodano, Giorgio, 2009. "Public Debt, Distortionary Taxation, and Monetary Policy," MPRA Paper 15348, University Library of Munich, Germany.
  8. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(1), pages 78 - 121.
  9. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
  10. Gary B. Gorton & Andrew Metrick, 2009. "Haircuts," NBER Working Papers 15273, National Bureau of Economic Research, Inc.
    • Gary Gorton & Andrew Metrick, 2010. "Haircuts," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 507-520.
  11. Antje Berndt & Hanno Lustig & Sevin Yeltekin, 2010. "How Does the U.S. Government Finance Fiscal Shocks?," NBER Working Papers 16458, National Bureau of Economic Research, Inc.
  12. Trabandt, Mathias & Uhlig, Harald, 2006. "How Far Are We From the Slippery Slope? The Laffer Curve Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5657, C.E.P.R. Discussion Papers.
  13. Darrell Duffie, 2010. "The Failure Mechanics of Dealer Banks," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 51-72, Winter.
  14. Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
  15. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 30-34, May.
  16. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
  17. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall.
  18. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  19. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(4), pages 305-327.
  20. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
  21. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(3), pages 501-528, April.
  22. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
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