Government Budget Constraint and the Limits to Monetary Policy: An Assessment

摘要

The author concludes that it is not true that tight money implies higher current and future inflation when coupon values are constant in real terms. The paradoxical result due to Sargent and Wallace (1981; 1984) and confirmed by Liviatan (1984) arises in the absence of a specification relating movements in capital, and hence output, to the demand for money. When this is recognized explicitly, tight money initially causes higher inflation but it subsequently falls gradually to the desired rate.