Economic Quarterly

1996

 

Fall 1996

Some Not-So-Unpleasant Monetarist Arithmetic

Michael Dotsey

The celebrated monetarist arithmetic argument of Sargent and Wallace implies outcomes that may be large and unpleasant. But a dynamic stochastic model calibrated to the U.S. economy reveals the quantitative effect of monetarist arithmetic to be small. Monetary policies that react to the level of debt produce nominal behavior quite similar to policies that are independent of debt. In actual practices, monetarist arithmetic is not so unpleasant after all.

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