Some Unpleasant Monetarist Arithmetic Thomas
J. Sargent and Neil Wallace http://research.mpls.frb.fed.us/research/qr/qr531.html PDF file:http://research.mpls.frb.fed.us/research/qr/qr531.pdf Comment on T.J. Sargent and N. Wallace: 'Some
Unpleasant Monetarist Arithmetic' Buiter,
Willem H. Monetarism in the United Kingdom,
ed. B. Griffiths and G.E. Wood, 1984,
London: Macmillan.
http://netec.mcc.ac.uk/BibEc/data/Papers/nbrnberwo0867.html PDF file:
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Some Pleasant Monetarist Arithmetic Michael
R. Darby http://www.minneapolisfed.org/research/authors/MichaelRDarby.html Vol. 9 No. 1, Winter
1985, "Some Pleasant Monetarist Arithmetic"
PDF
file: http://www.minneapolisfed.org/research/qr/qr914.html Originally published:
Vol. 8 No. 2, Spring 1984, "Some Pleasant Monetarist Arithmetic"
PDF
file:http://www.minneapolisfed.org/research/qr/qr822.pdf A Reply to Darby Preston J. Miller and Thomas
J. Sargent Originally published in Quarterly
Review Spring 1984
PDF file:
http://research.mpls.frb.fed.us/research/qr/qr823.pdf A Monetarist Model for Economic Stabilization:
Review and Update Keith M. Carlson Federal
Reserve Bank of St. Louis, Review,
1986.
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Fiscal Prerequisites for a Viable Managed Exchange
Rate Regime: A Non- Technical Eclectic Introduction Buiter,
Willem H. CEPRDiscussion
Papers No. 129, October 1986.
Abstract: The paper first reviews
the budget identities of the fiscal and monetary authorities and the solvency
constraint or present value budget constraint of the consolidated public
sector, for both closed and open economies. It then discusses the new conventional
wisdom concerning the fiscal roots of inflationand the budgetary prerequisites
for generating and stopping hyperinflation. The popular rationalexpectations
model of 'Unpleasant Monetarist Arithmetic' of Sargent and Wallace yields
ambiguouspredictions concerning the response of inflation to an increase
in the fundamental deficit. In addition themodel is incapable of generating
hyperinflation: the only runaway, explosive or unstable behaviour themodel
can exhibit is 'hyperdeflation'] In the open economy, the need to maintain
a managed exchangerate regime and the government's need to remain solvent
do not impose any constraint on the growthrate of domestic credit. Obstfeld's
proposition to the contrary is due to the omission of governmentbonds and
borrowing in his analysis. There is not yet any 'deep structural' theory
justifying the(exogenous) lower bounds on the stock of foreign exchange
reserves which are a characteristicassumption of the literature on collapsing
exchange rate regimes. In the absence of such a theory of'international
liquidity', one cannot construct a satisfactory model of a foreign exchange
crisis that is not at the same time a government solvency
crisis. If it is assumed that such
http://netec.mcc.ac.uk/BibEc/data/Papers/cprceprdp0129.html PDF file:
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A Fiscal Theory of Hyperdeflations? Some Surprising
Monetarist Arithmetic Willem
H. Buiter Oxford Economic Papers, 1987 (39):
111-118.
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A Note on Endogeneous Growth and Monetarist
Arithmetic I. King 1990.
http://netec.mcc.ac.uk/BibEc/data/Papers/fthcalgar127.html PDF file:
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More on Monetarist Arithmetic F. Papadia and S. Rossi Journal
of Banking & Finance, 14/1 (1990): 145-154
Abstract: In this paper it is shown
that the `provocative' result of Sargent and Wallace's monetarist arithmetic
-- namely the existence of a permanent trade-off between short-term and
long-term control of inflation when the path of fiscal policy is given
-- depends on the particular way in which the idea is modelled that the
private sector can only hold a limited amount of public debt. Once the
formulation is made consistent with the overlapping-generations model underlying
S--W's macroeconomic set-up, the trade-off is only temporary: in the long
run, the rate of inflation is independent of the monetary path initially
followed.
http://hyaena.elsevier.nl/cgi-bin/cas/tree/store/jbf/cas_sub/browse/browse.cgi?year=1990&volume=14&issue=1&aid=10 PDF file:
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Fiscal and Monetary Policy Under EMU: Credible
Inflation Targets or Unpleasant Monetary Arithmetic? Wendy Carlin, Colin P Mayer, Paul Levine and
Joseph Pearlman CEPRDiscussion
Papers No. 700, July 1992.
Abstract: The enterprise sectors
of Eastern Europe are undergoing fundamental reform. This article evaluates
alternative forms of corporate restructuring. It emphasizes differences
in the sequence in which reforms are undertaken in different countries.
In some countries, restructuring is being undertaken by the state before
privatization; in some, restructuring is delegated to private-sector institutions
before shares are offered to the public at large; and in others, public
offers of shares are preceding restructuring. The article suggests that
the recent theoretical literature on corporate ownership and vertical integration
provides a useful framework for evaluating alternative sequences of reform.
This points to four factors as being central to the reform process: contractual
incompleteness between the state, investors and managers; complementarity
between the assets of different stakeholders; the relative importance of
assets; and the relative abilities of different stakeholders. The continuing
role for the state in Eastern Europe is attributable to difficulties of
contracting between the state and private firms and the complementarity
between the assets of state and firms. The slow pace of privatization is
due to poor public finances and inefficient bureaucracies. There is one
country in which a substantial amount of restructuring has been undertaken
by both the state and the private sector, however: East Germany. This paper
documents in some detail the privatization process in East Germany. It
notes that five parties have been central to the reform process: the state,
the Treuhandanstalt, banks, Western companies and the incumbent management.
It records a gradual transfer of control from the state to the management
of firms. It argues that the central role played by banks and companies
in restructuring reflects an important complementarity between their assets
and those of former state-owned enterprises, and the fact that they can
offer valuable advice to East German management. This raises the question
of what East European countries that do not possess institutions with equivalent
skills and resources should do. The experience of East Germany suggests
that careful attention should be given to the governance of state agencies
and private-sector institutions. The role of financial institutions in
funding restructuring should be supplemented by non-financial companies
providing management advice. Risk capital will not be available, initially,
until East European enterprises have acquired adequate collateral or reputations.
In the mean time, international agencies will play a central role in funding
the transition.; The paper emphasizes the distinction between the purely
fiscal reasons for fiscal policy coordination under EMU (given a credible
low-inflation policy by the ECB), and the spillover effects of an uncoordinated
fiscal policy on monetary policy. The worst scenario is where an independent
ECB sets the common interest rate and responds to a rising government debt/GDP
ratio in either of the two `countries' with a looser monetary stance. The
result is high inflation, high debt/GDP ratios and a large public sector.
In our intermediate scenario the ECB sets the nominal interest rate and
the fiscal authorities bear sole responsibility for their own solvency.
The result again, is an excessively large public sector, but government
debt is contained and inflation is kept low. In these first two scenarios
fiscal policy coordination (with an independent ECB) is counterproductive.
The best scenario occurs with credible inflation targeting by the ECB.
This removes the incentive for the fiscal authorities to cause surprise
inflation. Welfare gains from fiscal coordination now exist but are only
substantial in a two-good EMU.
http://netec.mcc.ac.uk/BibEc/data/Papers/cprceprdp0700.html PDF file:
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Unpleasant Monetarist Arithmetic Revisited:
Central Bank Independence, Fiscal Policy and European Monetary Union N. M. Healey and P. Levine National
Westminster Bank Quarterly Review, August 1992, pp. 23-37.
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Monetary Policy, Interest Rates, and Inflation:
Budget Arithmetic Revisited Marco Espinosa and Steven Russell Federal
Reserve Bank of Atlanta, Working
Papers 93-12, 1993.
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Monetary and Fiscal Policy Interaction and Government
Debt Stabilization B. van Aarle, L. Bovenberg and M. Raith Tilburg University, CentER for Economic
Research, Discussion Papers,
1995 nr.1
Keywords: Game Theory; Central Banks;
Monetary Policy; National Debt; Fiscal Policy;E58; E52; E42; E63; C73;
Abstract: In many developing and
developed countries, government debt stabilization is an important policy
issue.This paper models the strategic interaction between the monetary
authorities who control monetization and the fiscal authorities who control
primary fiscal deficits.Government debt dynamics are driven by the interest
payments on outstanding debt and the part of the primary fiscal deficits
that is not monetized.Modelling the interaction as a differential game,
we compare the cooperative equilibrium and the non-cooperative Nash open-loop
equilibrium.The well-known unpleasant monetarist arithmetic is reinterpreted
in this differential game framework.We consider also the effects of making
the Central Bank more independent
http://dbiref.kub.nl:2080/greyfiles/center/1995/1.html PDF file
(1461 kb): http://dbiref.kub.nl:2080/greyfiles/center/1995/doc/1.pdf Fiscal and Monetary Policy and Inflation: The
Confederate States 1861-1865 Ari Gerstle Cliometric Society Undergraduate
Economic History Paper Prizes, 1995
Honorable Mention paper HTML file:
http://www.eh.net/Clio/Publications/confederate.shtml Some Not-So-Unpleasant Monetarist Arithmetic Michael Dotsey FRB of Richmond, Economic
Quarterly, Fall 1996
Abstract 1: The celebrated monetarist
arithmetic argument of Sargent and Wallace implies outcomes that may be
large and unpleasant. But a dynamic stochastic model calibrated to the
U.S. economy reveals the quantitative effect of monetarist arithmetic to
be small. Monetary policies that react to the level of debt produce nominal
behavior quite similar to policies that are independent of debt. In actual
practices, monetarist arithmetic is not so unpleasant after all.
Abstract 2: This paper analyzes the
quantitative significance of Sargent and Wallace's (1981) "Some Unpleasant
Monetarist Arithmetic" in a model that is parameterized to correspond with
U.S. data. The major result is that the monetarist arithmetic is not overly
unpleasant and that the nominal side of the economy is not very sensitive
to whether money growth does or does not respond to government debt.
PDF file
(448kb): http://www.rich.frb.org/eq/fall96/dotsey.pdf Some Even More Unpleasant Monetarist Arithmetic Bruce
Smith, Joydeep
Bhattacharya and Mark Guzman Canadian
Journal of Economics, August, 1998 Vol. 31 No. 3
Abstract: Does monetizing a deficit
always result in a higher rate of inflation than bond financing the same
deficit? T. J. Sargent and N. Wallace (1981) produced conditions under
which the answer was negative ('unpleasant monetarist arithmetic'). Subsequent
authors have challenged the empirical validity of these conditions. The
authors develop a model similar to that of Sargent and Wallace and modify
it to allow for financial intermediation. In the presence of reserve requirements,
unpleasant arithmetic arises even when the real rate of growth exceeds
the real return on bonds. Moreover, under empirically plausible restrictions,
there exists a unique equilibrium; no Laffer curve considerations arise.
http://netec.mcc.ac.uk/WoPEc/data/Articles/cjeissuedv:31:y:1998:i:3:p:596-623.html http://www.econ.iastate.edu/faculty/bhattacharya/publish.htm http://www.utpress.utoronto.ca/journal/jour5/cje_31_3.htm PDF file:
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The Origin of Mexico's 1994 Financial Crisis Francisco Gil-Diaz The Cato Journal, 17/3,
Winter 1998.
HTML file:
http://www.cato.org/pubs/journal/cj17n3-14.html Monetary Policy Arithmetic: Some Recent Contributions Joydeep
Bhattacharya and Joseph
H. Haslag Federal
Reserve Bank of Dallas, Economic
and Financial Review, 1999, Q3:
26-36.
Abstract: Sargent and Wallace (1981)
studied the feasibility of a bond-financed increase in government spending.
In their "unpleasant monetarist arithmetic", Sargent and Wallace showed
how using bonds to finance a permanent deficit today may necessitate faster
money growth in the future, yielding higher inflation today. The logic
behind this "spectacular'' result is predicated on the satisfaction of
one crucial condition: the real interest rate offered on bonds has to exceed
the real growth rate of the economy. In this article, Joydeep Bhattacharya
and Joseph Haslag review some recent contributions to this literature in
light of the contentious nature of this stricture. Most notably, the authors
demonstrate that the conditions under which the unpleasant monetarist arithmetic
holds may be even weaker than what Sargent and Wallace had originally envisioned.
In addition, the authors consider the possibility of financing the deficit
by changing reserve requirements instead of raising money growth rates.
Interestingly, a pleasant version of the financing arithmetic emerges.
http://www.econ.iastate.edu/faculty/bhattacharya/publish.htm http://www.dallasfed.org/htm/pubs/abstracts/efr/9903.html PDF file:
http://www.dallasfed.org/htm/pubs/pdfs/efr/efr9903.pdf Tight Money Policies and Inflation Revisited Joydeep
Bhattacharya and Noritaka
Kudoh Presented to the Spring
1999 Midwest Macroeconomics Conference in Pittsburgh.
Abstract: In this paper, we revisit
the link between tight money policies and inflation in the spirit of Sargent
and Wallace's (1981)
paper "Some Unpleasant Monetarist
Arithmetic." To that end, we study a standard overlapping generations model
with production
with two special features: money
is dominated in rate of return, and intermediated storage is subject to
a conventional reserve
requirement on currency. Under fairly
general specifications of technology and preferences, we show that the
qualifiers imposed by
Sargent and Wallace (1981) and others
to generate the "spectacular" result that tight money policies may be inflationary
(dubbed
"unpleasant monetarist arithmetic")
are sufficient and by no means necessary. In particular, we establish that
unpleasant monetarist
arithmetic may obtain even if a)
the real interest rate on government debt is less than the growth rate
and b) the marginal product of
capital is less than the growth rate.
In other words, unpleasant monetarist arithmetic may obtain in spite of
a law return to
government debt provided capital
earns a premium over it. The substantial weakening of the conditions required
for unpleasant
arithmetic is attributed to the assumption
of a concave neoclassical production function.
http://www.acsu.buffalo.edu/~kudoh/uma.html http://www.econ.iastate.edu/faculty/bhattacharya/work.htm PDF file:
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On Some Unpleasant Monetarist Arthmetic M. J. Manohar Rao Indian
Economic Journal, 48/1,
1999-2000.
PDF file:
http://www.indianeconomics.org/material/j-sart~5.pdf
