Is it Time for Some Unpleasant Monetarist Arithmetic?

18 Pages Posted: 14 Jul 2021 Last revised: 6 Jul 2022

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Date Written: July, 2021

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

JEL Classification: E4, E5, E6

Suggested Citation

Andolfatto, David, Is it Time for Some Unpleasant Monetarist Arithmetic? (July, 2021). Available at SSRN: https://ssrn.com/abstract=3885397 or http://dx.doi.org/10.20955/r.103.315-32

David Andolfatto (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

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Canada
604 291-5825 (Phone)
604 291-5944 (Fax)

Federal Reserve Bank of St. Louis ( email )

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United States

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