TY  - JOUR
AU  - Cochrane,John H.
TI  - A Frictionless View of U.S. Inflation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6646
PY  - 1998
Y2  - July 1998
UR  - http://www.nber.org/papers/w6646
L1  - http://www.nber.org/papers/w6646.pdf
N1  - Author contact info:
John H. Cochrane
Booth School of Business
University of Chicago
5807 S. Woodlawn
Chicago, IL  60637
Tel: 773/702-3059
Fax: 773/702-0458
E-Mail: john.cochrane@chicagobooth.edu
M1  - published as John H. Cochrane. "A Frictionless View of U.S. Inflation," in Ben S. Bernanke and Julio J. Rotemberg, editors, "NBER Macroeconomics Annual 1998, volume 13" MIT Press (1999)

AB  - Financial innovation challenges the foundations of monetary theory, and standard monetary theory has not been very successful at describing the history of U.S. inflation.  Motivated by these observations, I ask: Can we understand the history of U.S. inflation using a framework that ignores monetary frictions? The fiscal theory of the price level allows us to think about price level determination with no monetary frictions.  The price level adjusts to equilibrate the real value of nominal government debt with the present value of surpluses.  I describe the theory, and I argue that it is a return to pre-quantity theoretic ideas in which money is valued via a commodity standard or because the government accepts it to pay taxes.  Both sources of value are immune to financial innovation and the presence or absence of monetary frictions. I then interpret the history of U.S. inflation with a fiscal-theory, frictionless view.  I show how the fiscal theory can accommodate the stylized fact that deficits and inflation seem to be negatively, not positively correlated.  I verify its prediction that open market operations do not affect  inflation. I show how debt policy has already smoothed inflation a great deal.
ER  -