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Monetary policy in the presence of a stochastic deficit

Author

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  • John Bryant
  • Neil Wallace

Abstract

This paper presents a welfare analysis of monetary policy rules that differ as regards the extent to which monetary policy accommodates an exogenous, stochastic deficit. Examples show that a nonaccommodating rule, one involving a higher ratio of bonds to currency the higher the deficit, is not necessarily better than rules that accommodate: either a rule involving a constant ratio of bonds to currency or one involving a lower ratio of bonds to currency the higher the deficit. Moreover, the nonaccommodating rule can imply more variation in the price level than the accommodating rules.

Suggested Citation

  • John Bryant & Neil Wallace, 1979. "Monetary policy in the presence of a stochastic deficit," Staff Report 42, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:42
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    References listed on IDEAS

    as
    1. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 413-435.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
    3. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-381, April.
    4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Cited by:

    1. John Bryant, 1979. "Demand management: an illustrative example," Staff Report 46, Federal Reserve Bank of Minneapolis.
    2. Edward Nelson, 2004. "Money and the Transmission Mechanism in the Optimizing IS-LM Specification," History of Political Economy, Duke University Press, vol. 36(5), pages 271-304, Supplemen.

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