Inflation Expectations in the Monetarist Black Box
Abstract
Jerome Stein (1974, 1976) boils the monetarist-fiscalist controversy down to this: Fiscalists believe a bond-financed increase in the budget deficit has permanent expansionary effects. Monetarists believe that an increased budget deficit, if unaccompanied by more rapid monetary expansion, will leave excess demand for goods virtually unchanged, because a rise in the financial wealth/money ratio will raise interest rates and crowd out private investment. For monetarists, bondfinanced increases in deficit spending have temporary stimulating effects which fade away as lower private investment offsets higher government spending.' Stein (1974) offers a general model in three differential equations which encompasses both fiscalist and monetarist views as special cases. His 1976 paper provides empirical estimates of two of these three equations in integral form: (1) [U ] =R 1+ Lzv j+[RiG]
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