Some Even More Unpleasant Monetarist Arithmetic
Does monetizing a deficit always result in a higher rate of inflation than bond financing the same deficit? T. J. Sargent and N. Wallace (1981) produced conditions under which the answer was negative ('unpleasant monetarist arithmetic'). Subsequent authors have challenged the empirical validity of these conditions. The authors develop a model similar to that of Sargent and Wallace and modify it to allow for financial intermediation. In the presence of reserve requirements, unpleasant arithmetic arises even when the real rate of growth exceeds the real return on bonds. Moreover, under empirically plausible restrictions, there exists a unique equilibrium; no Laffer curve considerations arise.
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Volume (Year): 31 (1998)
Issue (Month): 3 (August)
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