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Understanding policy in the great recession: Some unpleasant fiscal arithmetic

  • Cochrane, John H.

I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009. I also examine policy alternatives to avoid deflation, and how fiscal pressures might lead to inflation. I conclude that the central bank may be almost powerless to avoid deflation or inflation; that an eventual fiscal inflation can come well before large deficits or monetization are realized, and that it is likely to come with stagnation rather than a boom.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 1 (January)
Pages: 2-30

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:1:p:2-30
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Gary Gorton & Andrew Metrick, 2010. "Haircuts," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 507-520.
  2. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco.
  3. Gary Gorton & Andrew Metrick, 2010. "Securitized Banking and the Run on Repo," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  4. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," CRSP working papers 478, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Craig Burnside & Martin Eichenbaum, 2005. "Government Finance in the Wake of Currency Crises," 2005 Meeting Papers 429, Society for Economic Dynamics.
  6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1998. "Prospective Deficits and the Asian Currency Crisis," NBER Working Papers 6758, National Bureau of Economic Research, Inc.
  7. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  8. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  9. Trabandt, Mathias & Uhlig, Harald, 2010. "How far are we from the slippery slope? The Laffer curve revisited," Working Paper Series 1174, European Central Bank.
  10. Adam Ashcraft & Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Two Monetary Tools: Interest Rates and Haircuts," NBER Chapters, in: NBER Macroeconomics Annual 2010, Volume 25, pages 143-180 National Bureau of Economic Research, Inc.
  11. Darrell Duffie, 2010. "The failure mechanics of dealer banks," BIS Working Papers 301, Bank for International Settlements.
  12. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
  13. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  14. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
  15. Antje Berndt & Hanno Lustig & Şevin Yeltekin, 2012. "How Does the US Government Finance Fiscal Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 69-104, January.
  16. Alessandro Piergallini & Giorgio Rodano, 2012. "Public Debt, Distortionary Taxation, and Monetary Policy," CEIS Research Paper 220, Tor Vergata University, CEIS, revised 07 Feb 2012.
  17. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  18. Cochrane, John H, 1992. "Explaining the Variance of Price-Dividend Ratios," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 243-80.
  19. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
  20. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
  21. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
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