Is It Time for Some Unpleasant Monetarist Arithmetic?

David Andolfatto ()

Review, 2021, vol. 103, issue 3, 315-332

Abstract: Sargent and Wallace (1981) published "Some Unpleasant Monetarist Arithmetic" 40 years ago. Their central message was that a central bank may not have the power to determine the long-run rate of inflation without fiscal support. In a policy regime where the fiscal authority is non-Ricardian, an attempt on the part of the central bank to lower inflation may end up backfiring. I develop a structural model to illustrate this result through the use of a diagram. In addition, I use the model to explain how low inflation, low interest rates, and high primary budget deficits can coexist. I also use the model to explain why it is easier for a central bank to lower inflation than to raise it. I conclude with some recommendations for state-contingent monetary policy.

Keywords: interest rates; monetary policy; inflation; budget deficits (search for similar items in EconPapers)
JEL-codes: E4 E5 E6 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlrv:92884

DOI: 10.20955/r.103.315-32

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