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Tight Money and the Sustainability of Public Debt

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  • 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.

Suggested Citation

  • Sergey Pekarski, 2017. "Tight Money and the Sustainability of Public Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 191-223, February.
    • Handle: RePEc:ijc:ijcjou:y:2017:q:0:a:5
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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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