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A Comment on Sargent and Wallace: The problem of Debt Interest Seen in Historical Perspective

In: Monetarism in the United Kingdom

Author

Listed:
  • Tim Congdon

Abstract

Sargent and Wallace draw some paradoxical conclusions. Perhaps the most surprising is that a government which finances its budget deficit responsibly by bond sales may, in certain circumstances, be following a course of action which in the long run is more inflationary than immediate monetisation of its debt. Rather than investigate the special assumptions which lie behind this result, we shall discuss a general theme running through the paper and place it in an historical perspective. This theme is that, in the presence of large budget deficits, a money supply rule may become ineffective and unsustainable as a method of defeating inflation. The reason is that there is an upper limit to the size of real interest-bearing government debt per capita. If budget deficits are financed with bonds the size of the nominal debt may increase explosively because each extra bond issue adds to the government’s interest costs and, hence, to future budget deficits. Sooner or later, the only way the level of debt can be reduced in real terms is by inflation. To make the point more concisely, money supply control cannot succeed unless accompanied by fiscal discipline.

Suggested Citation

  • Tim Congdon, 1984. "A Comment on Sargent and Wallace: The problem of Debt Interest Seen in Historical Perspective," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 67-71, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-1-349-06284-3_5
    DOI: 10.1007/978-1-349-06284-3_5
    as

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