Understanding policy in the great recession: Some unpleasant fiscal arithmetic

I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008–2009. I also examine policy alternatives to avoid deflation, and how fiscal pressures might lead to inflation. I conclude that the central bank may be almost powerless to avoid deflation or inflation; that an eventual fiscal inflation can come well before large deficits or monetization are realized, and that it is likely to come with stagnation rather than a boom.