The coronavirus pandemic of 2019-20 confronted fiscally dominant regimes around the world with the question of whether the large deficits caused by the health crisis should be monetized or financed by issuing debt. The unpleasant monetarist arithmetic of Sargent and Wallace (1981) states that in a fiscally dominant regime tighter money now can cause higher inflation in the future. In spite of the qualifier ‘unpleasant,’ this result is positive in nature, and, therefore, void of normative content. I analyze conditions under which it is optimal in a welfare sense for the central bank to delay inflation by issuing debt to finance part of the fiscal deficit. The analysis is conducted in the context of a model in which the aforementioned monetarist arithmetic holds, in the sense that if the government finds it optimal to delay inflation, it does so knowing that it would result in higher inflation in the future. The central result of the paper is that delaying inflation is optimal when the fiscal deficit is expected to decline over time.

debt problem was exacerbated by the new government being forced to print money without any economic resources to back it. John Maynard Keynes characterised Hyperinflation affected the German Papiermark, the currency of the Weimar Republic, between 1921 and 1923, primarily in 1923. The German currency had seen significant inflation during the First World War due to the way in which the German government funded its war effort through borrowing, with debts of 156 billion marks by 1918. This national debt was substantially increased by 50 billion marks o Hyperinflation affected the German Papiermark, the currency of the Weimar Republic, between 1921 and 1923, primarily in 1923. The German currency had seen significant inflation during the First World War due to the way in which the German government funded its war effort through borrowing, with debts of 156 billion marks by 1918. This national debt was substantially increased by 50 billion marks of reparations payable in cash and in-kind (e.g., with coal and timber) under the May 1921 London Schedule of Payments agreed after the Versailles treaty. This inflation continued into the post-war period, particularly when in August 1921 the German central bank began buying hard cash with paper currency at any price, which they claimed was to pay reparations in hard cash, though little in the way of cash reparations payments were made until 1924. The currency stabilised in early 1922, but then hyperinflation took off: the exchange value of the mark fell from 320 marks per dollar in mid 1922 to 7,400 marks per US dollar by December 1922. This hyperinflation continued into 1923, and by November 1923, one US dollar was worth 4,210,500,000,000 marks. Various measures were introduced by German authorities to address this, including a new currency called the Rentenmark, backed by mortgage bonds, later itself replaced by the Reichsmark, and the blocking of the national bank from printing further paper currency. By 1924 the currency Various measures were introduced by German authorities to address this, including a new currency called the Rentenmark, backed by mortgage bonds, later itself replaced by the Reichsmark, and the blocking of the national bank from printing further paper currency. By 1924 the currency had stabilised and German reparations payments began again under the Dawes Plan. As the catastrophic fall in the value of the mark had effectively wiped out debts owed, some debts (e.g. mortgages) were revalued so that the lenders could recoup some of their money. Hyperinflation caused considerable internal political instability in the country. This strategy failed as Germany lost the war, which left the new Weimar Republic saddled with massive war debts that it could not afford: the national debt stood at 156 billion marks in 1918. The debt problem was exacerbated by the new government being forced to print money without any economic resources to back it. John Maynard Keynes characterised the inflationary policies of various wartime governments in his 1919 book The Economic Consequences of the Peace as follows: The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The government paid these workers by printing more and more banknotes, with Germany soon being swamped with paper money, exacerbating the hyperinflation even further. == Hyperinflation == A loaf of bread in Berlin that cost around 160 marks at the end of 1922 cost 200 billion marks by late 1923. By November 1923, one US dollar was worth 4.2105 trillion German marks. == Stabilization == German monetary economics was at that time heavily influenced by Chartalism and the German Historical School, which conditioned the way the hyperinflation was analysed. The hyperinflation crisis led prominent economists and politicians to seek a means to stabilize German currency. A decree of 1925 reinstated some mortgages at 25% of face value in the new currency, effectively 25,000,000,000 times their value in the old paper marks, if they had been held for at least five years. Similarly, Particularly, Allied analysis of German statistics showed that printing of paper currency was being used to maintain tax rates much lower than in Allied countries, to fund relatively high levels of state expenditure, and that this effect was being worsened by unrestricted capital flight from Germany. Reparations payments continued more or less in full from 1924 to 1931 without a return of hyperinflation and, after 1930, Germany protested that reparations payments were deflationary. Inflation also enabled the German government to pay off its substantial domestic debts, particularly war debts, in devalued marks. One point on which historians tend to agree is that the printing of cash by the German government to make payments to striking workers in the Ruhr, who were refusing to make reparations deliveries to the Allies, contributed to hyperinflation. The occupation of the Ruhr also caused German output to fall. Regardless of the reason for the declining value of the German currency, the decline caused prices of goods to rise rapidly, increasing the cost of operating the German government, which could not be financed by raising taxes because those taxes would be payable in the ever-falling German currency. The resulting deficit was financed by some combination of issuing bonds and simply creating more money: both increasing the supply of German mark-denominated financial assets on the market and so further reducing the currency's price. When the German people realized that their money was rapidly losing value, they tried to spend it quickly. That increased monetary velocity and caused an ever-faster increase in prices, creating a vicious cycle. The government and the banks had two unacceptable alternatives. If they stopped inflation, there would be immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection and possibly even revolution.