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Stability of steady states in a model of pleasant monetarist arithmetic

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  • Marco Espinosa-Vega
  • Steven Russell

Abstract

In this paper the authors study the stability properties of the alternative steady-state equilibria that arise in a neoclassical production model that delivers pleasant monetarist arithmetic. They show that if the government’s monetary policy rule involves a fixed money supply growth rate, then “pleasant arithmetic” steady states—steady states from which a permanent increase in the money growth and inflation rates is associated with a permanent decrease in the real interest rate and a permanent increase in the level of output—are dynamically stable.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2001-20.

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Date of creation: 2001
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Handle: RePEc:fip:fedawp:2001-20

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Keywords: Econometric models ; Monetary policy;

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References

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  1. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  2. Bhattacharya, Joydeep & Huybens, Elisabeth & Guzman, Mark G. & Smith, Bruce D., 1997. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Staff General Research Papers 5136, Iowa State University, Department of Economics.
  3. Bruce Smith & J. Bhattacharya & Mark Guzman, 1998. "Some Even More Unpleasant Monetarist Arithmetic," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 596-623, August.
  4. Joydeep Bhattacharya & Noritaka Kudoh, 2002. "Tight money policies and inflation revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 185-217, May.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  6. James Bullard & Steven Russell, 1998. "How costly is sustained low inflation for the U.S. economy?," Working Papers 1997-012, Federal Reserve Bank of St. Louis.
  7. Marco Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," Working Paper 98-6, Federal Reserve Bank of Atlanta.
  8. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  9. Sargent, Thomas J. & Wallace, Neil, 1976. "Rational expectations and the theory of economic policy," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 169-183, April.
  10. Bullard, James & Russell, Steven, 1999. "An empirically plausible model of low real interest rates and unbacked government debt," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 477-508, December.
  11. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  12. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  13. Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
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Cited by:
  1. Patrick Honohan, 2003. "Taxation of Financial Intermediation : Theory and Practice for Emerging Economines," World Bank Publications, The World Bank, number 15122, August.

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