Some Even More Unpleasant Monetarist Arithmetic
AbstractDoes monetizing a deficit result in a higher or a lower rate of inflation than does bond financing the same deficit? Sargent and Wallace (1981) produced conditions under which bond finance leads to a higher rate of inflation than deficit monetization ("unpleasant monetarist arithmetic''). However, it has been argued that unpleasant arithmetic is unlikely to obtain in practice, as it requires a number of conditions to hold that are rarely satisfied empirically. We develop a model essentially identical to that of Sargent and Wallace, and modify it to allow for a simple type of financial intermediation that they exogenously precluded. In the presence of reserve requirements, unpleasant arithmetic arises even when the real rate of growth exceeds the real return on bonds. Moreover, under a very mild restriction on the interest elasticity of savings, there exists a unique equilibrium to which unpleasant arithmetic results necessarily apply. No "Laffer curve'' considerations arise. We also discuss various tensions that arise between determinacy and efficiency of monetary equilibria.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5084.
Date of creation: 01 Aug 1998
Date of revision:
Publication status: Published in Canadian Journal of Economics, August 1998, vol. 31 no. 3, pp. 596-623
Contact details of provider:
Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
Other versions of this item:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Stacey L. Schreft & Bruce D. Smith, 2001.
"The conduct of monetary policy with a shrinking stock of government debt,"
Research Working Paper
RWP 01-09, Federal Reserve Bank of Kansas City.
- Schreft, Stacey L & Smith, Bruce D, 2002. "The Conduct of Monetary Policy with a Shrinking Stock of Government Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 848-82, August.
- Stacey L. Schreft & Bruce D. Smith, 2002. "The conduct of monetary policy with a shrinking stock of government debt," Proceedings, Federal Reserve Bank of Cleveland, pages 848-886.
- Mark G. Guzman, 2006.
"The impact of paying interest on reserves in the presence of government deficit financing,"
Economics & Management Discussion Papers
em-dp2006-39, Henley Business School, Reading University.
- Mark G. Guzman, 2008. "The Impact Of Paying Interest On Reserves In The Presence Of Government Deficit Financing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 624-642, October.
- Mark G. Guzman, 2004. "The impact of paying interest on reserves in the presence of government deficit financing," Working Papers 0406, Federal Reserve Bank of Dallas.
- Mark G. Guzman, 2006. "The impact of paying interest on reserves in the presence of government deficit financing," Economic Analysis Research Group Working Papers earg-wp2006-08, Henley Business School, Reading University.
- Mark G. Guzman, 2007. "The Impact of Paying Interest on Reserves in the Presence of Government Deficit Financing," Money Macro and Finance (MMF) Research Group Conference 2006 92, Money Macro and Finance Research Group.
- Marco Espinosa-Vega & Steven Russell, 2001. "Stability of steady states in a model of pleasant monetarist arithmetic," Working Paper 2001-20, Federal Reserve Bank of Atlanta.
- Stacey Schreft & Bruce Smith, 2008.
"The social value of risk-free government debt,"
Annals of Finance,
Springer, vol. 4(2), pages 131-155, March.
- repec:rdg:wpaper:em-dp2006-39 is not listed on IDEAS
- Fung, Michael K. Y. & Ho, Wai-Ming & Zhu, Lijing, 2000. "Stagflationary effect of government bond financing in the transforming Chinese economy: a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 61(1), pages 111-135, February.
- Cothren, Richard, 2006. "A model of optimal legal restrictions and open market operations," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 480-492, September.
- Bhattacharya, Joydeep & Haslag, Joseph, 1999.
"Monetary Policy Arithmetic: Some Recent Contributions,"
Staff General Research Papers
10388, Iowa State University, Department of Economics.
- 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.
- Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
- Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 9901, Federal Reserve Bank of Dallas.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephanie Bridges) The email address of this maintainer does not seem to be valid anymore. Please ask Stephanie Bridges to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.