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On the Relevance or Irrelevance of Public Financial Policy: Indexation,Price Rigidities and Optimal Monetary Policy

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  • Joseph E. Stiglitz

Abstract

This paper is concerned with delineating conditions under which public financial policies have no real and/or price effects. In the absence of intergenerational distribution effects, public financial policy is irrelevant:an increase in government debt (whether indexed or not), an exchange of anindexed bond for a non-indexed bond, or an exchange of a short term bond fora long term bond has neither real nor financial effects. We also describe changes in financial policy in which the supply of bonds are increased and the nominal interest rate increases, which have an effect on the rate of inflation, but no real effects. We examine the implications of price and wage rigidities and the existence of a non-interest bearing financial asset used for transactions purposes for the validity of these irrelevance theorems.In general, public financial policies have effects on intergenerational distribution; alternative financial policies have implications for the pattern of capital accumulation (an effect which was the center of the literature on money and growth) and on the sharing of risks among members of different generations. We examine the consequences of three alternative financial policies,a fixed supply of financial assets, a fixed price level, and a fixed real supply of government indebtedness; under some plausible conditions, the latter policy may provide for the least intergenerational variability inconsumption.

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File URL: http://www.nber.org/papers/w1106.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1106.

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Date of creation: Apr 1983
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Publication status: published as Stiglitz, Joseph E. "On the Relevance or Irrelevance of Public Financial Policy: Indexation, Price Rigidities, and Optimal Monetary Policies." Inflation, Debt, and Indexation, edited by Rudiger Dornbusch and Mario Henrique Simonsen, pp. 183-222. Cambridge: M.I.T. Press, (1983).
Handle: RePEc:nbr:nberwo:1106

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  1. Shell, Karl & Sidrauski, Miguel & Stiglitz, Joseph E, 1969. "Capital Gains, Income, and Saving," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 15-26, January.
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. John Bryant & Neil Wallace, 1980. "A suggestion for further simplifying the theory of money," Staff Report 62, Federal Reserve Bank of Minneapolis.
  4. Fischer, Stanley, 1979. "Anticipations and the Nonneutrality of Money," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 225-52, April.
  5. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  7. David Cass & Menahem E. Yaari, 1965. "Individual Saving, Aggregate Capital Accumulation, and Efficient Growth," Cowles Foundation Discussion Papers 198, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Greenwald, B & Stiglitz, Joseph E, 1987. "Keynesian, New Keynesian and New Classical Economics," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 119-33, March.
  2. Jacob A. Frenkel & Assaf Razin, 1984. "The International Transmission of Fiscal Expenditures and Budget Deficits in the World Economy," NBER Working Papers 1527, National Bureau of Economic Research, Inc.

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