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Monetary Policy Arithmetic: Some Recent Contributions

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Author Info
Bhattacharya, Joydeep
Haslag, J.

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Abstract

Sargent and Wallace (1981) study the feasibility of a bond-financed increase in government spending. In their "unpleasant monetarist arithmetic," Sargent and Wallace show how using bonds to finance a permanent deficit today may necessitate faster money growth in the future, yielding higher inflation today. The logic behind this spectacular result is predicated on the satisfaction of one crucial condition: the real interest rate offered on bonds has to exceed the real growth rate of the economy. Joydeep Bhattacharya and Joseph Haslag review some recent contributions to the literature on the subject in light of the contentious nature of this stricture. The authors derive the unpleasant monetarist arithmetic result by employing a weaker set of necessary conditions than those Sargent-Wallace use. In addition, the authors consider the possibility of financing the deficit by changing reserve requirements instead of raising money growth rates. Interestingly, a pleasant version of the financing arithmetic emerges.

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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10388.

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Date of creation: 22 May 2003
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Publication status: Published in Economic and Financial Review, 1999, No. 3rd qtr., pp. 26-36.
Handle: RePEc:isu:genres:10388

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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.:
  1. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr. [Downloadable!]
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  2. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March. [Downloadable!] (restricted)
  3. Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 99-01, Federal Reserve Bank of Dallas. [Downloadable!]
  4. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  6. Andrew B. Abel, 1992. "Can the government roll over its debt forever?," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-18.
  7. 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. [Downloadable!] (restricted)
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  8. Thomas M. Supel & Richard M. Todd, 1984. "Should currency be priced like cars?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
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  10. Rao Aiyagari, S. & Gertler, Mark, 1985. "The backing of government bonds and monetarism," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 19-44, July. [Downloadable!] (restricted)
  11. Preston J. Miller & Thomas J. Sargent, 1984. "A reply to Darby," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr. [Downloadable!]
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  1. Joydeep Bhattacharya & Joseph H. Haslag, 2000. "Reliance, composition, and inflation," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 20-28. [Downloadable!]
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  2. Jan Libich & Andrew Hughes Hallett & Petr Stehlik, 2007. "Monetary And Fiscal Policy Interaction With Various Degrees And Types Of Commitment," CAMA Working Papers 2007-21, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
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