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Tight Money Policies and Inflation Revisited

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  • Bhattacharya, Joydeep
  • Kudoh, N

Abstract

This paper reconsiders the link between tight money policies and inflation in the spirit of Sargent and Wallace's (1981) influential paper "Some Unpleasant Monetarist Arithmetic''. A standard neoclassical model with production, capital, bonds, and return-dominated currency is used to study the long-run effects on inflation of a tightening of monetary policy engineered via a open market sale of bonds. The potential for tight money policies to be inflationary (unpleasant arithmetic) is shown to exist even when the real interest rate is below the growth rate of the economy. Equilibria exhibiting unpleasant arithmetic can be stable. In contrast, when monetary policy is conducted via an inflation target rule, the only stable equilibrium is the one that exhibits pleasant arithmetic. The two monetary policy rules therefore produce sharply different predictions about the likely observability of unpleasant arithmetic in real-world economies.

Suggested Citation

  • Bhattacharya, Joydeep & Kudoh, N, 2002. "Tight Money Policies and Inflation Revisited," Staff General Research Papers Archive 5085, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:5085
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    Cited by:

    1. Futagami, Koichi & Shibata, Akihisa, 1998. "Budget Deficits and Economic Growth," Public Finance = Finances publiques, , vol. 53(3-4), pages 331-354.
    2. 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.
    3. Andreas Schabert, 2006. "Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 742-762, October.
    4. Schabert, Andreas, 2005. "Identifying monetary policy shocks with changes in open market operations," European Economic Review, Elsevier, vol. 49(3), pages 561-577, April.
    5. Sergey Pekarski, 2017. "Tight Money and the Sustainability of Public Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 191-223, February.
    6. Barnett, Richard C., 2005. "Coordinating macroeconomic policy in a simple AK growth model," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 621-647, December.
    7. von Thadden, Leopold, 2012. "Monetary policy rules in an OLG model with non-superneutral money," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 147-166.
    8. Leopold von Thadden, 2004. "Active monetary policy, passive fiscal policy and the value of pure debt: some further monetarist arithmetic," Money Macro and Finance (MMF) Research Group Conference 2003 108, Money Macro and Finance Research Group.
    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. Kudoh, Noritaka, 2005. "Monetary policy arithmetic for a deflationary economy," Economics Letters, Elsevier, vol. 87(2), pages 161-167, May.
    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.
    12. von Thadden, Leopold, 2004. "Active monetary policy, passive fiscal policy and the value of public debt: Some further monetarist arithmetic," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 223-251, June.

    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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