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Money, Output, and the Nominal National Debt

Author

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  • Champ, Bruce
  • Freeman, Scott

Abstract

This paper presents a model of finitely lived rational agents in which unanticipated innovations in the stock of fiat money affect real variables. An unanticipated inflation reduces the real value of the nominally denominated national debt, thereby reducing the crowding-out of capital and/or the tax burden. Both effects stimulate increased investment in capital, which leads to an increase in real output and wages in the following periods. In contrast with price-surprise models, these real effects occur even if the monetary innovation is instantly and perfectly observed by agents. Copyright 1990 by American Economic Association.

Suggested Citation

  • Champ, Bruce & Freeman, Scott, 1990. "Money, Output, and the Nominal National Debt," American Economic Review, American Economic Association, vol. 80(3), pages 390-397, June.
    • Handle: RePEc:aea:aecrev:v:80:y:1990:i:3:p:390-97
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    Cited by:

    1. Michael, Hatcher, 2013. "Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting," SIRE Discussion Papers 2013-19, Scottish Institute for Research in Economics (SIRE).
    2. Crettez, Bertrand & Michel, Philippe & Wigniolle, Bertrand, 2002. "Seigniorage and public good in an OLG model with cash-in-advance constraints," Research in Economics, Elsevier, vol. 56(4), pages 333-364, December.
    3. De Grauwe, Paul & Gerba, Eddie, 2018. "The role of cognitive limitations and heterogeneous expectations for aggregate production and credit cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 206-236.
    4. Michael Hatcher, 2013. "The inflation risk premium on government debt in an overlapping generations model," Working Papers 2013_17, Business School - Economics, University of Glasgow.
    5. Andolfatto, David, 2003. "Monetary Implications of the Hayashi-Prescott Hypothesis for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 1-20, December.
    6. Haslag, Joseph H. & Hein, Scott E., 1995. "Does it matter how monetary policy is implemented?," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 359-386, April.
    7. Paul De Grauwe & Eddie Gerba, 2015. "Stock Market Cycles and Supply Side Dynamics: Two Worlds, One Vision?," CESifo Working Paper Series 5573, CESifo.
    8. Hatcher, Michael, 2014. "Indexed versus nominal government debt under inflation and price-level targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 126-145.
    9. Michel, P. & Wigniolle, B., 2000. "Temporary Bubbles in an Economy with Under-Accumulation," Papiers d'Economie Mathématique et Applications 2000.91, Université Panthéon-Sorbonne (Paris 1).
    10. de Grauwe, Paul & Gerba, Eddie, 2015. "Stock market cycles and supply side dynamics," FinMaP-Working Papers 45, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    11. Jia, Pengfei, 2020. "Negative Interest Rates on Central Bank Digital Currency," MPRA Paper 103828, University Library of Munich, Germany.

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