Showing papers by "Neil Wallace published in 1985"

Some Unpleasant Monetarist Arithmetic

Abstract: In his presidential address to the American Economic Association (AEA), Milton Friedman (1968) warned not to expect too much from monetary policy. In particular, Friedman argued that monetary policy could not permanently influence the levels of real output, unemployment, or real rates of return on securities. However, Friedman did assert that a monetary authority could exert substantial control over the inflation rate, especially in the long run. The purpose of this paper is to argue that, even in an economy that satisfies monetarist assumptions, if monetary policy is interpreted as open market operations, then Friedman’s list of the things that monetary policy cannot permanently control may have to be expanded to include inflation.

iDENTIFICATION AND ESTIMATION OF A MODEL

Abstract: This paper constructs a model with two structural equations: the government budget constraint and a linear version of Cagan's portfolio balance equation. the model contains a continuum of equilibria with "sunspot equilibria." Closed forms for the solutions are found. Even though there is a continuum of equil­ ibria, the model is overidentified econometrically, so that the model restricts time series data on price levels and currency stocks. We describe how the free parameters of the model can be estimated, including some parameters that serve to index particular members of the continuum of equilibria. The sunspot equil­ ibria hold out some promise of explaining anomalies in the observed behavior of inflation and real balances during hyperinflations.

A Shred of Evidence on Public Acceptance of Privately Issued Currency

Abstract: Articles may be reprinted if the source is credited and the Research Department is provided with copies of reprints. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. A key result of Sargent and Wallace's \" Some Unpleasant Monetarist Arithmetic\" (1981) is that a permanently higher government deficit must eventually be accommodated by increases in the monetary base. In \"Some Pleasant Monetarist Arithmetic\" (in this issue), Darby argues that this result does not currently apply to the U.S. economy because it depends on an assumption which is not supported by the data. In this reply to Darby we explain why we find his argument unconvincing and why we remain concerned about the longer-term monetary implications of high prospective federal budget deficits. Background Sargent and Wallace describe an economic model in which the real growth rate y and the real interest rate r are assumed to be constants for all time. It is also assumed that monetary and budget policies initially imply a steady-state equilibrium where the real interest rate exceeds the real growth rate (r > y). Given these assumptions, Sargent and Wallace show that any attempt to run a permanently higher deficit net-of-interest is simply not feasible unless the supply of base money is eventually increased. Without an eventual increase in the base-money supply, a permanent increase in the deficit would cause the ratio of interest-bearing government bonds to national income to diverge to infinity (see Figure 1), so at some point that ratio would outstrip the ratio of total wealth to income. That is, the government would eventually be unable to command the resources needed to pay its debt. Darby's model retains Sargent and Wallace's assumptions that the real interest rate and real growth rate are

Identification and Estimation of a Model of Hyperinflation with a Continuum of "Sunspot" Equilibria

Abstract: This paper constructs a model with two structural equations: the Government budget constraint and a linear version of Cagan’s portfolio balance equation. The model contains a continuum of equilibria with “sunspot equilibria.” Closed forms for the solutions are found. Even though there is a continuum of equilibria, the model is overidentified econometrically, so that the model restricts time series data on price levels and currency stocks. We describe how the free parameters of the model can be estimated, including some parameters that serve to index particular members of the continuum of equilibria. The sunspot equilibria hold out some promise of explaining anomalies in the observed behavior of inflation and real balances during hyperinflations.

Ricardian equivalence and money dominated in return: are they mutually consistent generally?

Abstract: Different conclusions about the effects of open market operations are reached even among economists using full employment and rational expectations models. I show that these differences can be attributed to different assumptions regarding the concept of the deficit that is held fixed for an open market operation, the diversity among agents, and the features generating money demand. With regard to those features, I argue that plausible ways of explaining the holding of low-return money preclude the kind of perfect credit markets needed to obtain Ricardian equivalence.