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Rational Expectations and Inflation$
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Thomas J. Sargent

Print publication date: 2013

Print ISBN-13: 9780691158709

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691158709.001.0001

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Some Unpleasant Monetarist Arithmetic

Some Unpleasant Monetarist Arithmetic

(p.162) 5 Some Unpleasant Monetarist Arithmetic
Rational Expectations and Inflation

Neil Wallace

Princeton University Press

This chapter is a variation on the theme that monetary and fiscal policies are interrelated and must necessarily be coordinated. The issue of coordination arises when one wants to know whether it is possible for monetary policy permanently to influence an economy's inflation rate. One can imagine a monetary authority sufficiently powerful vis-à-vis the fiscal authority that by the imposition of slower rates of growth of base money, both now and into the indefinite future, it can successfully constrain fiscal policy by telling the fiscal authority how much seigniorage it can expect now and in the future. In this setting, monetary and fiscal policies are coordinated by having the monetary authority discipline the fiscal authority. The chapter first describes a simple model that embodies unadulterated monetarism before discussing the Cagan-Bresciani-Turroni effect.

Keywords:   coordination, monetary policy, inflation, fiscal policy, monetary authority, fiscal authority, monetarism, Cagan-Bresciani-Turroni effect

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