Abstract:
The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace's (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the Covid pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the magnitude of this redistribution caught them by surprise.
Subjects:
fiscal theory of the price level
FTPL
unpleasant monetarist arithmetic
monetarism
Redistribution effect of inflation
Fiscal Inflation
Price Level
Inflation
Deflation
Money Supply
Credit
Money Multipliers
Fiscal Policy
General Financial Markets
General (includes Measurement and Data)
Macroeconomics and monetary economics
Financial Economics