Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic
I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009, to think about fiscal pressures on US inflation, and what sequence of events might surround such an inflation. I emphasize that a fiscal inflation can come well before large deficits or monetization are realized, and is likely to come with stagnation rather than a boom.
I thank Michael Woodford for helpful comments, and Francisco Vaquez-Grande for the surplus plot. I acknowledge research support from CRSP. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January. citation courtesy of