 Tight Money Policies and Inflation RevisitedJoydeep Bhattacharya and Noritaka Kudoh Staff General Research Papers Archive from Iowa State University, Department of Economics 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. JEL-codes: E00 (search for similar items in EconPapers) Published in Canadian Journal of Economics, May 2002, vol. 35 no. 2, pp. 185-217 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:5085 Access Statistics for this paper More papers in Staff General Research Papers Archive from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC. |
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