Research

Real Balances, the Inflation Tax, and Sargent's Consumption Function

Sargent's (1987a) textbook treatment of static equilibrium theory argues that if expected inflation is positive, real balance effects are perverse, and the traditional argument, whereby flexible wages guarantee full employment, is incorrect. This paper argues that Sargent misrepresents traditional static theory by using as a model of consumption an equilibrium condition from the monetary growth literature. perverse real balance effects appear when this equilibrium condition is treated as a behavioral relationship. A well-specified optimizing model is presented which suggests the proper treatment of real balance effects and expected inflation in static equilibrium.

Publication Information
Article Title: Real Balances, the Inflation Tax, and Sargent's Consumption Function
Journal: Journal of Macroeconomics (1990)
v. 12, iss. 4, pp. 663-74
Author(s): Cushing, Matthew J
Researcher Information
    
Cushing, Matthew J
Cushing, Matthew J
Professor of Economics
Expertise:
  • Labor Economics
  • Econometrics
  • Macroeconomics
Economics
CoB 525 U
P.O. Box 880489
University of Nebraska-Lincoln
Lincoln, NE 68588-0489, USA
Phone: (402) 472-2323
Fax: (402) 472-9700
mcushing1@unl.edu