Inflationary finance involves first, the tax on cash balances from expected inflation, and second, a capital levy from unexpected inflation. From the standpoint of minimizing distortions, these capital levies are attractive, ex post, to the policymaker. In a full equilibrium two conditions hold:...

Optimal debt management can be thought of in three stages. First, if taxes are lump sum and the other conditions for Ricardian equivalence hold, then the division of government financing between debt and taxes is irrelevant, and the whole level of public debt is indeterminate from an optimal-tax...

Under a discretionary regime the monetary authority makes no commitments about future money and prices. Then, if surprise inflation conveys economic benefits and if people form expectations rationally, it turns out that the equilibrium involves high and variable monetary growth and inflation....

Previous models of rules versus discretion are extended to include uncertainty about the policymaker's "type." When people observe low inflation, they raise the possibility that the policymaker is committed to low inflation (type 1). This enhancement of reputation gives the uncommitted...

An important "empirical regularity" is the strong positive effect of money shocks on output and employment. One strand of business cycle theory relates this finding to temporary confusions between absolute and relative price changes. These models predict positive output effects of unperceived...

Natural-rate models suggest that the systematic parts of monetary policy will not have important consequences for the business cycle. Nevertheless, we often observe high and variable rates of monetary growth, and a tendency for monetary authorities to pursue countercyclical policies. This...

Previous models of rules versus discretion are extended to include uncertainty about the policymaker's "type." When people observe low inflation, they raise the possibility that the policymaker is committed to low inflation (type 1). This enhancement of reputation gives the uncommitted...

Under a discretionary regime the monetary authority makes no commitments about future money and prices. Then, if surprise inflation conveys economic benefits and if people form expectations rationally, it turns out that the equilibrium involves high and variable monetary growth and inflation....

In a discretionary regime the monetary authority can print more money and create more inflation than people expect. But, although these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their...