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Working Paper
Optimal Monetarist Arithmetic or How to Inflate If You Must
In their celebrated 1981 paper "Some Unpleasant Monetarist Arithmetic," Sargent and Wallace show that when a central bank is required to transfer resources to the fiscal authority, it faces a trade-off: if it chooses to keep inflation low in the short run, then it must be willing to accept higher inflation in the long run. In this paper I characterize the optimal interest rate (and inflation) policy by a central bank faced with a version of the Sargent-Wallace scenario. I explore this question in a setting in which a certain amount has to be transferred for an uncertain period of time. I find ...
Working Paper
Optimal Monetarist Arithmetic or How to Inflate If You Must
In their celebrated 1981 paper ”Some Unpleasant Monetarist Arithmetic,” Sargent and Wallace show that when a central bank is required to transfer resources to the fiscal authority, it faces a trade-off: if it chooses to keep inflation low in the short run, then it must be willing to accept higher inflation in the long run. In this paper I characterize the optimal interest rate (and inflation) policy by a central bank faced with a version of the Sargent-Wallace scenario. I explore this question in a setting in which a certain amount has to be transferred for an uncertain period of time. I ...
Working Paper
Fiscal Dominance
Central banks' resolve and independence are chronically tested by fiscal authorities wishing to impose their desired policies, often leading to socially undesirable economic outcomes. I study how the fiscal and monetary authorities' disagreement over outcomes and their choice of active instruments shape the implementation of policy, dispensing with commitment or first-mover advantage. I characterize the equilibrium for various combinations of active (and correspondingly, passive) instruments, identify which sources of disagreement play a role in each case, and show whether and under what ...
Working Paper
Fiscal Dominance
Central banks' resolve and independence is chronically tested by fiscal authorities wishing to impose their desired policies, often leading to socially undesirable economic outcomes. I study how the fiscal and monetary authorities' disagreement over outcomes and their choice of active instruments shape the implementation of policy, dispensing with commitment or first-mover advantage. I characterize the equilibrium for various combinations of active (and correspondingly, passive) instruments, identify which sources of disagreement play a role in each case, and show whether and under what ...
Journal Article
Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements
As a matter of arithmetic, the trends of US government debt and deficits will eventually result in an outrageously high government debt-to-GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it? This article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that "dominate" central bank intentions to keep inflation low. Is it a serious possibility for the United States in the near future? And how might various policies change (especially ...