Tight Money and the Sustainability of Public Debt

Sergey Pekarski

HSE Working papers from National Research University Higher School of Economics

Abstract: In the celebrated paper “Some unpleasant monetarist arithmetic”, Sargent and Wallace (1981) showed that tight monetary policy is not feasible unless it is supported by appropriate fiscal adjustment. In this paper, we explore a simple forward-looking monetary model to show that an anticipated decrease in the growth rate of base money is not necessarily characterized by “unpleasant arithmetic”. This is due to a possible transitory gain in seigniorage, which keeps public debt on a sustainable path. High interest rates worsen the fiscal stance, but actually support the feasibility of anticipated tighter monetary policy. Thus an increase in the present discounted value of budget deficits does not necessarily have inflationary consequences.

Keywords: public debt sustainability; tight money paradox; unpleasant monetarist arithmetic (search for similar items in EconPapers)
JEL-codes: E41 E52 E61 E63 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Published in WP BRP Series: Economics / EC, June 2015, pages 1-27

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Journal Article: Tight Money and the Sustainability of Public Debt (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:95/ec/2015

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