A Frictionless View of U.S. Inflation

Cochrane, John

A Frictionless View of U.S. Inflation

No 6646, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Financial innovation challenges the foundations of monetary theory, and standard monetary theory has not been very successful at describing the history of U.S. inflation. Motivated by these observations, I ask: Can we understand the history of U.S. inflation using a framework that ignores monetary frictions? The fiscal theory of the price level allows us to think about price level determination with no monetary frictions. The price level adjusts to equilibrate the real value of nominal government debt with the present value of surpluses. I describe the theory, and I argue that it is a return to pre-quantity theoretic ideas in which money is valued via a commodity standard or because the government accepts it to pay taxes. Both sources of value are immune to financial innovation and the presence or absence of monetary frictions. I then interpret the history of U.S. inflation with a fiscal-theory, frictionless view. I show how the fiscal theory can accommodate the stylized fact that deficits and inflation seem to be negatively, not positively correlated. I verify its prediction that open market operations do not affect inflation. I show how debt policy has already smoothed inflation a great deal.

JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 1998-07
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (110)

Published as A Frictionless View of US Inflation , John H. Cochrane. in NBER Macroeconomics Annual 1998, volume 13 , Bernanke and Rotemberg. 1999

Downloads: (external link)
http://www.nber.org/papers/w6646.pdf (application/pdf)

Related works:
Chapter: A Frictionless View of US Inflation (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:6646

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6646

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().