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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. John H. Cochrane, 1989. "Explaining the Variance of Price Dividend Ratios," NBER Working Papers 3157, National Bureau of Economic Research, Inc.
  2. John H. Cochrane, 2008. "The Dog That Did Not Bark: A Defense of Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1533-1575, July.
  3. Alessandro Piergallini & Giorgio Rodano, 2012. "Public Debt, Distortionary Taxation, and Monetary Policy," CEIS Research Paper 220, Tor Vergata University, CEIS, revised 07 Feb 2012.
  4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  5. 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.
  6. Harald Uhlig & Mathias Trabandt, 2009. "How Far are We from the Slippery Slope? The Laffer Curve Revisited," Working Papers 2009-005, Becker Friedman Institute for Research In Economics.
  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, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," NBER Working Papers 6771, National Bureau of Economic Research, Inc.
  9. Darrell Duffie, 2010. "The failure mechanics of dealer banks," BIS Working Papers 301, Bank for International Settlements.
  10. Adam Ashcraft & Nicolae Gârleanu & Lasse Heje Pedersen, 2010. "Two Monetary Tools: Interest Rates and Haircuts," NBER Working Papers 16337, National Bureau of Economic Research, Inc.
  11. Andrew Metrick & Gary Gorton, 2009. "Haircuts," Yale School of Management Working Papers amz2395, Yale School of Management, revised 01 Sep 2009.
    • Gary Gorton & Andrew Metrick, 2010. "Haircuts," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 507-520.
  12. Craig Burnside & Martin Eichenbaum, 2005. "Government Finance in the Wake of Currency Crises," 2005 Meeting Papers 429, Society for Economic Dynamics.
  13. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
  14. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1999. "Prospective deficits and the asian currency crisis," Policy Research Working Paper Series 2174, The World Bank.
  15. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," Center for International and Development Economics Research, Working Paper Series qt124628cx, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  16. Antje Berndt & Hanno Lustig & Sevin Yeltekin, . "How does the U.S. government finance fiscal shocks?," GSIA Working Papers 2006-E70, Carnegie Mellon University, Tepper School of Business.
  17. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
  18. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
  19. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
  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. 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.
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