This article, authored by Thomas J. Sargent and Neil Wallace, published in the Federal Reserve Bank of Minneapolis Quarterly Review, explores the limitations of monetary policy in a monetarist economy. The authors argue that even in an economy where the monetary base is closely linked to the price level and the monetary authority can generate revenue through seignorage, the monetary authority's control over inflation is limited. They demonstrate that under certain conditions, such as when fiscal and monetary policies are coordinated and the public's demand for interest-bearing government debt has a specific form, the monetary authority's ability to control inflation is significantly constrained. The paper presents two scenarios: one where monetary policy dominates fiscal policy, and another where fiscal policy dominates monetary policy. In the first scenario, the monetary authority can permanently control inflation by setting the growth rate of the monetary base, while in the second scenario, the monetary authority's control over inflation is less powerful and can lead to higher inflation if the fiscal authority's deficits cannot be financed solely by new bond sales. The authors use a model that embodies unadulterated monetarism to illustrate these points. They show that tighter current monetary policy can lead to higher future inflation, even if it temporarily reduces inflation. This is because the demand for government bonds, which is constrained by the real rate of return on bonds exceeding the economy's growth rate, forces the monetary authority to create more money to finance the government's debt, leading to higher inflation. The paper also includes an appendix that describes a simple overlapping generations model that generates the assumptions used in the main analysis. Another appendix analyzes a model where the demand for base money depends on the expected rate of inflation, showing that tighter current monetary policy can cause higher inflation in the present.This article, authored by Thomas J. Sargent and Neil Wallace, published in the Federal Reserve Bank of Minneapolis Quarterly Review, explores the limitations of monetary policy in a monetarist economy. The authors argue that even in an economy where the monetary base is closely linked to the price level and the monetary authority can generate revenue through seignorage, the monetary authority's control over inflation is limited. They demonstrate that under certain conditions, such as when fiscal and monetary policies are coordinated and the public's demand for interest-bearing government debt has a specific form, the monetary authority's ability to control inflation is significantly constrained. The paper presents two scenarios: one where monetary policy dominates fiscal policy, and another where fiscal policy dominates monetary policy. In the first scenario, the monetary authority can permanently control inflation by setting the growth rate of the monetary base, while in the second scenario, the monetary authority's control over inflation is less powerful and can lead to higher inflation if the fiscal authority's deficits cannot be financed solely by new bond sales. The authors use a model that embodies unadulterated monetarism to illustrate these points. They show that tighter current monetary policy can lead to higher future inflation, even if it temporarily reduces inflation. This is because the demand for government bonds, which is constrained by the real rate of return on bonds exceeding the economy's growth rate, forces the monetary authority to create more money to finance the government's debt, leading to higher inflation. The paper also includes an appendix that describes a simple overlapping generations model that generates the assumptions used in the main analysis. Another appendix analyzes a model where the demand for base money depends on the expected rate of inflation, showing that tighter current monetary policy can cause higher inflation in the present.