Does monetizing a deficit result in a higher or a lower rate of inflation than does bond financing the same deficit? Sargent and Wallace (1981) produced conditions under which bond finance leads to a higher rate of inflation than deficit monetization ("unpleasant monetarist arithmetic'')....

We consider an otherwise conventional monetary growth model in which spatial separation and limited communication create a transactions role for currency, and stochastic relocation gives rise to financial intermediaries. In this framework we consider how changes in fiscal and monetary policy,...