Monetary Policy Arithmetic: Some Recent Contributions
AbstractSargent 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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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10388.
Date of creation: 01 Jul 1999
Date of revision:
Publication status: Published in Economic and Financial Review, Third Quarter 1999,, pp. 26-36
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Other versions of this item:
- 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.
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.:
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