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Stability of steady states in a model of pleasant monetarist arithmetic

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  • Marco A. Espinosa-Vega
  • Steven Russell

Abstract

In this paper the authors study the stability properties of the alternative steady-state equilibria that arise in a neoclassical production model that delivers pleasant monetarist arithmetic. They show that if the government’s monetary policy rule involves a fixed money supply growth rate, then “pleasant arithmetic” steady states—steady states from which a permanent increase in the money growth and inflation rates is associated with a permanent decrease in the real interest rate and a permanent increase in the level of output—are dynamically stable.

Suggested Citation

  • Marco A. Espinosa-Vega & Steven Russell, 2001. "Stability of steady states in a model of pleasant monetarist arithmetic," FRB Atlanta Working Paper 2001-20, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2001-20
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    References listed on IDEAS

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    1. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    2. Marco A. Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," FRB Atlanta Working Paper 98-6, Federal Reserve Bank of Atlanta.
    3. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    4. James B. Bullard & Steven Russell, 2004. "How costly is sustained low inflation for the U.S. economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-68.
    5. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    6. Sargent, Thomas J. & Wallace, Neil, 1976. "Rational expectations and the theory of economic policy," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 169-183, April.
    7. Bullard, James & Russell, Steven, 1999. "An empirically plausible model of low real interest rates and unbacked government debt," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 477-508, December.
    8. Joydeep Bhattacharya & Mark G. Guzman & Elisabeth Huybens & Bruce D. Smith, 1995. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Working Papers 9501, Centro de Investigacion Economica, ITAM.
    9. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    10. Joydeep Bhattacharya & Noritaka Kudoh, 2002. "Tight money policies and inflation revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 185-217, May.
    11. Bruce Smith & J. Bhattacharya & Mark Guzman, 1998. "Some Even More Unpleasant Monetarist Arithmetic," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 596-623, August.
    12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    13. Bhattacharya, Joydeep & Kudoh, Noritaka, 2001. "Tight Money Policies and Inflation Revisited," ISU General Staff Papers 200110010700001347, Iowa State University, Department of Economics.
    14. Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
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    Cited by:

    1. Patrick Honohan, 2003. "Taxation of Financial Intermediation : Theory and Practice for Emerging Economines," World Bank Publications, The World Bank, number 15122, April.

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    Keywords

    Econometric models ; Monetary policy;

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