SOME EVEN MORE UNPLEASANT MONETARIST ARITHMETIC

Does monetizing a deficit always result in a higher rate of inflation than bond financing the same deficit? Sargent and Wallace (1981) produ ced conditions under which the answer was negative ('unpleasant moneta rist arithmetic'). Subsequent authors have challenged the empirical va lidity of these conditions. We develop a model similar to that of Sarg ent and Wallace and modify it to allow for financial intermediation. I n the presence of reserve requirements, unpleasant arithmetic arises e ven when the real rate of growth exceeds the real return on bonds. Mor eover, under empirically plausible restrictions, there exists a unique equilibrium; no Laffer curve considerations arise.