Stability of Steady States in a Model of Pleasant Monetarist Arithmetic

Marco Espinosa-Vega and Steven Russell
Working Paper 2001-20
November 2001

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In this paper the authors study the stability properties of the alternative steady-state equilibria that arise in a neoclassical production model that delivers pleasant monetarist arithmetic. They show that if the government’s monetary policy rule involves a fixed money supply growth rate, then “pleasant arithmetic” steady states—steady states from which a permanent increase in the money growth and inflation rates is associated with a permanent decrease in the real interest rate and a permanent increase in the level of output—are dynamically stable.

JEL classification: E4, E5, E6

Key words: pleasant monetarist arithmetic, stability

The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Marco Espinosa-Vega, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8630, or Steven Russell, Department of Economics, Indiana University Purdue University Indianapolis, 425 University Boulevard, Indianapolis, Indiana 46202, 317-274-0420,