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February 2017 issue
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Aramonte, Rosen, Schindler
Eijffinger, Mahieu, Raes
Bluedorn, Bowdler, Koch
Takahashi
Pekarski
Ehrmann, Pfaifar, Santoro
Karaca, Tugan
Boeckx, Dossche, Peersman
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Tight Money and the Sustainability of Public Debt

by Sergey Pekarski
National Research University Higher School of Economics

Abstract

In the celebrated paper “Some Unpleasant Monetarist Arithmetic,” Sargent and Wallace (1981) show that tight monetary policy is not feasible unless it is supported by appropriate fiscal adjustment. In this paper, we explore a simple forwardlooking 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 supported by a temporal decrease in the real interest rate, which keeps public debt on a sustainable path. An important implication is that an increase in the present value of future budget deficits does not necessarily have inflationary consequences.

JEL Codes: E41, E52, E61, E63.

 
Full article (PDF, 33 pages, 406 kb)