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Some Even More Unpleasant Monetarist Arithmetic

Author

Listed:
  • Bhattacharya, Joydeep
  • Guzman, Mark G.
  • Smith, Bruce D.

Abstract

Does monetizing a deficit result in a higher or a lower rate of inflation than does bond financing the same deficit? Sargent and Wallace (1981) produced conditions under which bond finance leads to a higher rate of inflation than deficit monetization ("unpleasant monetarist arithmetic''). However, it has been argued that unpleasant arithmetic is unlikely to obtain in practice, as it requires a number of conditions to hold that are rarely satisfied empirically. We develop a model essentially identical to that of Sargent and Wallace, and modify it to allow for a simple type of financial intermediation that they exogenously precluded. In the presence of reserve requirements, unpleasant arithmetic arises even when the real rate of growth exceeds the real return on bonds. Moreover, under a very mild restriction on the interest elasticity of savings, there exists a unique equilibrium to which unpleasant arithmetic results necessarily apply. No "Laffer curve'' considerations arise. We also discuss various tensions that arise between determinacy and efficiency of monetary equilibria.

Suggested Citation

  • Bhattacharya, Joydeep & Guzman, Mark G. & Smith, Bruce D., 1998. "Some Even More Unpleasant Monetarist Arithmetic," Staff General Research Papers Archive 5084, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:5084
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    Citations

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    Cited by:

    1. Schreft, Stacey L & Smith, Bruce D, 2002. "The Conduct of Monetary Policy with a Shrinking Stock of Government Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 848-882, August.
    2. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
    3. Joydeep Bhattacharya & Joseph H. Haslag, 1999. "Monetary policy arithmetic: some recent contributions," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 26-36.
    4. Barnett, Richard C., 2005. "Coordinating macroeconomic policy in a simple AK growth model," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 621-647, December.
    5. Mark G. Guzman, 2008. "The Impact Of Paying Interest On Reserves In The Presence Of Government Deficit Financing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 624-642, October.
    6. Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 9901, Federal Reserve Bank of Dallas.
    7. repec:rdg:wpaper:em-dp2006-39 is not listed on IDEAS
    8. Stacey Schreft & Bruce Smith, 2008. "The social value of risk-free government debt," Annals of Finance, Springer, vol. 4(2), pages 131-155, March.
    9. 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.
    10. Fung, Michael K. Y. & Ho, Wai-Ming & Zhu, Lijing, 2000. "Stagflationary effect of government bond financing in the transforming Chinese economy: a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 61(1), pages 111-135, February.
    11. Cothren, Richard, 2006. "A model of optimal legal restrictions and open market operations," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 480-492, September.

    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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