In a long-standing controversy over monetary experiences in colonial America, the main substantive issue concerns large and rapid increases in stocks of paper currency that were followed by negligible changes in price levels. The "backing theory" or anticlassical interpretation is that prices failed to respond to major increases in total money supplies. The "quantity theory" or classical hypothesis, by contrast, is that specie was exported in amounts that left total money stocks approximately unchanged. This paper develops and applies a strategy for resolving this fundamental disagreement despite the absence of data on stocks and flows of specie.

This paper considers the possible theoretical validity of the following "monetarist hypothesis": that a constant, positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money. The question is studied in a discrete-time, perfect-foresight version of the competitive equilibrium model of Sidrauski, modified by the inclusion of government bonds as a third asset. It is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments, but that it is valid under the conventional definition. It is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth, provided that the difference is less than the rate of time preference. These formal conclusions do not take account of possible limitations on taxing capacity arising from default incentives that tend to grow with the stock of bonds.

This paper investigates the conjecture that oligopolistic pricing behavior will invalidate the Lucas-Sargent policy-ineffectiveness proposition even if expectations are formed rationally. The procedure is to examine the properties of an analytical macroeconomic model that incorporates a simplified version of the MPS wage-price sector. It is shown that the validity of the conjecture depends upon the precise manner in which lags are built into the price adjustment equation. A crucial condition is isolated and used to motivate an empirical test. The results, based on quarterly U.S. data, are predominantly consistent with the ineffectiveness proposition.

This paper considers the validity of the Lucas-Sargent Proposition, which concerns the ineffectiveness of countercyclical monetary policy when expectations are rational, under the assumption that prices are "sticky." The model of Sargent and Wallace is modified so as to incorporate stickiness as follows: in each period the price adjusts to the market-clearing value only if the latter is far from the expected value (i.e., when the cost of maintaining an inappropriate price exceeds the lump-sum cost of a revision). Otherwise the price equals the value previously expected. Given this modification, the proposition remains valid.

In a long-standing controversy over monetary experiences in colonial America, the main substantive issue concerns large and rapid increases in stocks of paper currency that were followed by negligible changes in price levels. The "backing theory" or anticlassical interpretation is that prices failed to respond to major increases in total money supplies. The "quantity theory" or classical hypothesis, by contrast, is that specie was exported in amounts that left total money stocks approximately unchanged. This paper develops and applies a strategy for resolving this fundamental disagreement despite the absence of data on stocks and flows of specie.

This paper considers the possible theoretical validity of the following "monetarjst hypothesis": that a constant, positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money. The question is studied in a discrete-time, perfect-foresight version of the competitive equilibrium model of It is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments, but is valid under the conventional definition. It is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth, provided that the difference is less than the rate of time preference.

This paper investigates the conjecture that oligopolistic pricing behavior will invalidate the Lucas-Sargent policy-ineffectiveness proposition even if expectations are formed rationally. The procedure is to examine the properties of an analytical macroeconomic model that incorporates a simplified version of the MPS wage-price sector. It is shown that the validity of the conjecture depends upon the precise manner in which lags are built into the price adjustment equation. A crucial condition is isolated and used to motivate an empirical test. The results, based on quarterly U.S. data, are predominantly consistent with the ineffectiveness proposition.

This paper considers the validity of the Lucas-Sargent Proposition, which concerns the ineffectiveness of countercyclical monetary policy when expectations are rational, under the assumption that prices are "sticky." The model of Sargent and Wallace is modified so as to incorporate stickiness as follows: in each period the price adjusts to the market-clearing value only if the latter is far from the expected value (i.e., when the cost of maintaining an inappropriate price exceeds the lump-sum cost of a revision). Otherwise the price equals the value previously expected. Given this modification, the proposition remains valid.