TY  - JOUR
AU  - McCallum,Bennett T.
TI  - Are Bond-Financed Deficits Inflationary? A Ricardian Analysis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 905
PY  - 1984
Y2  - April 1984
UR  - http://www.nber.org/papers/w0905
L1  - http://www.nber.org/papers/w0905.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu
AB  - This paper considers the possible theoretical validity of the following "monetarist hypothesis": that a constant, positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money. The question is studied in a discrete-time, perfect-foresight version of the competitive equilibrium model of Sidrauski (1967), modified by the inclusion of government bonds as a third asset. It is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments, but is valid under the conventional definition. It is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth, provided that the difference is less than the rate of time preference. In addition to the main analysis, the paper includes comments on alternative deficit concepts, a brief consideration of data pertaining to the announced budget plans of the Reagan administration, and a new look at a much- studied issue: whether the operation of a Friedman-type constant money growth rule (with non-activist fiscal rules) would be dynamically feasible.
ER  -