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Monetary Policy Arithmetic: Some Recent Contributions

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  • Bhattacharya, Joydeep
  • Haslag, Joseph

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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Bibliographic 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: 01 Jul 1999
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Publication status: Published in Economic and Financial Review, Third Quarter 1999,, pp. 26-36
Handle: RePEc:isu:genres:10388

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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References

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  1. 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.
  2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  3. Champ,Bruce & Freeman,Scott & Haslag,Joseph, 2011. "Modeling Monetary Economies," Cambridge Books, Cambridge University Press, number 9780521177009, April.
  4. Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 9901, Federal Reserve Bank of Dallas.
  5. Bhattacharya, Joydeep & Guzman, Mark G. & Smith, Bruce D., 1998. "Some Even More Unpleasant Monetarist Arithmetic," Staff General Research Papers 5084, Iowa State University, Department of Economics.
  6. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  8. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December.
  9. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  10. Preston J. Miller & Thomas J. Sargent, 1984. "A reply to Darby," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  11. Thomas M. Supel & Richard M. Todd, 1984. "Should currency be priced like cars?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  12. 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.
  13. 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.
  14. Andrew B. Abel, 1992. "Can the government roll over its debt forever?," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-18.
  15. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "The fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 22-32.
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Cited by:
  1. Jan Libich & Petr Stehlik, 2008. "Fiscal Rigidity In A Monetary Union: The Calvo Timing And Beyond," CAMA Working Papers 2008-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Kudoh, Noritaka, 2005. "Monetary policy arithmetic for a deflationary economy," Economics Letters, Elsevier, vol. 87(2), pages 161-167, May.
  3. Hughes Hallett, Andrew & Libich, Jan & StehlĂ­k, Petr, 2007. "Monetary and Fiscal Policy Interaction with Various Degrees and Types of Commitment," CEPR Discussion Papers 6586, C.E.P.R. Discussion Papers.
  4. Bhattacharya, Joydeep & Haslag, Joseph, 2000. "Reliance, Composition, and Inflation," Staff General Research Papers 10389, Iowa State University, Department of Economics.

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