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Understanding policy in the great recession: Some unpleasant fiscal arithmetic

Listed author(s):
  • 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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File URL: http://www.sciencedirect.com/science/article/pii/S0014-2921(10)00103-0
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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. Trabandt, Mathias & Uhlig, Harald, 2006. "How Far Are We From the Slippery Slope? The Laffer Curve Revisited," CEPR Discussion Papers 5657, C.E.P.R. Discussion Papers.
  2. Burnside, C. & Eichenbaum, M. & Rebelo, S., 1998. "Prospective Deficits and the Asian Currency Crisis," RCER Working Papers 458, University of Rochester - Center for Economic Research (RCER).
  3. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2006. "Government finance in the wake of currency crises," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 401-440, April.
  4. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
  5. 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.
  6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  7. Nicolae B. Garleanu & Lasse Heje Pedersen & Adam B. Ashcraft, 2010. "Two Monetary Tools: Interest-Rates and Haircuts," 2010 Meeting Papers 1102, Society for Economic Dynamics.
  8. 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.
  9. Darrell Duffie, 2010. "The failure mechanics of dealer banks," BIS Working Papers 301, Bank for International Settlements.
  10. Piergallini Alessandro & Rodano Giorgio, 2012. "Public Debt, Distortionary Taxation, and Monetary Policy," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 225-248.
  11. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
  12. Gary Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," Yale School of Management Working Papers amz2358, Yale School of Management, revised 01 Sep 2009.
  13. 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.
  14. Antje Berndt & Hanno Lustig & Sevin Yeltekin, "undated". "How does the U.S. government finance fiscal shocks?," GSIA Working Papers 2006-E70, Carnegie Mellon University, Tepper School of Business.
  15. 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.
  16. 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.
  17. 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.
  18. Cochrane, John H, 1992. "Explaining the Variance of Price-Dividend Ratios," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 243-280.
  19. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
  20. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
  21. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
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