The conduct of monetary policy with a shrinking stock of government debt
This article considers the consequences for a central bank of a declining stock of government debt. The model has a treasury that taxes, spends, and issues debt; a central bank that conducts open market operations in treasury debt; and banks that intermediate private savings. It suggests that a sufficiently small stock of debt can put an economy on the Pareto inferior side of the seigniorage Laffer curve, implying unnecessarily high inflation. If there is also a primary budget deficit, equilibrium might not exist. Discount-window lending is a potentially desirable alternative to open market operations, especially if the loans are not subsidized.
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References listed on IDEAS
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- Greenwood, Jeremy & Smith, Bruce D., 1997.
"Financial markets in development, and the development of financial markets,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 21(1), pages 145-181, January.
- Greenwood, J. & Smith, B.D., 1995. "Financial Markets in Development, and the Development of Financial Markets," RCER Working Papers 406, University of Rochester - Center for Economic Research (RCER).
- Stacey L. Schreft & Bruce D. Smith, 1999.
"The evolution of cash transactions : some implications for monetary policy,"
Research Working Paper
99-02, Federal Reserve Bank of Kansas City.
- Schreft, Stacey L. & Smith, Bruce D., 2000. "The evolution of cash transactions: Some implications for monetary policy," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 97-120, August.
- Stacey L. Schreft & Bruce D. Smith, 1997. "The evolution of cash transactions: some implications for monetary policy," Financial Services working paper 97-04, Federal Reserve Bank of Cleveland.
- Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 327-44.
- Bruce Smith & J. Bhattacharya & Mark Guzman, 1998.
"Some Even More Unpleasant Monetarist Arithmetic,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 31(3), pages 596-623, August.
- Smith, B.D., 1988.
"Interest On Reserves And Sunspot Equilibria: Friedman'S Proposal Reconsidered,"
RCER Working Papers
119, University of Rochester - Center for Economic Research (RCER).
- Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 93-105.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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