‘‘Unpleasant Monetarist Arithmetic’’ Revisited: The Role of Transitional Monetary Dynamics
AbstractIn the celebrated paper “Some unpleasant monetarist arithmetic,” Sargent and Wallace (1981) showed that tight monetary policy is not feasible unless it is not supported by appropriate fiscal adjustment. In this paper we explore a simple forward-looking monetary model to show that gradual or anticipated tightening of monetary policy is not necessarily characterized by “unpleasant arithmetic.” This is due to possible short-run gains in seigniorage revenues during the transition period. By applying the principle of sustainable macroeconomic policy that constrains the future choices of both fiscal and monetary authorities, we show that high interest rates on public debt work for the benefit of “pleasant arithmetic.”
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Bibliographic InfoPaper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number WP13_2007_13.
Length: 20 pages
Date of creation: Jan 2007
Date of revision:
fiscal and monetary policy interaction; sustainable macroeconomic policy; unpleasant monetarist arithmetic.;
Find related papers by JEL classification:
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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