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On the Monetization of Deficits

  • Alan S. Blinder

Whether or not a deficit is monetized is often thought to have important macroeconomic ramifications. This paper is organized around two questions.The first is: Does monetization matter?, or morespecifically, For a given budget deficit, do nominal or real variables behave differently depending on whether deficits are monetized or not? Virtually all macro models givean affirmative answer. After sorting out some theoretical issues that arise in a dynamic context, I present some new time series evidence which suggests that monetization matters mostly for nominal variables.The second question is: What factors determine how much monetization the Federal Reserve will do?After discussing some normative rules, I offer a game-theoretic argument to explain why a central bank may choose not to monetize deficits at all and may even contract bank reserves when the government raises its deficit. The empirical work turns up a surprisingly systematic link between budget deficits and growth in reserves. This relationship suggests that the Federal Reserve monetizes deficits less when inflation is high and when government purchases are growing rapidly.

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File URL: http://www.nber.org/papers/w1052.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1052.

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Date of creation: Dec 1982
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Publication status: published as Blinder, Alan S. "One the Monetization of Deficits." The Economic Consequences of Government Deficits, edited by Laurence H. Meyer, pp. 39-73. Boston: Kluwer-Nijhoff, (1983).
Handle: RePEc:nbr:nberwo:1052
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  1. Alan S. Blinder, 1978. "Temporary Income Taxes and Consumer Spending," NBER Working Papers 0283, National Bureau of Economic Research, Inc.
  2. James Tobin, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 301-317.
  3. Bennett T. McCallum, 1981. "Monetarist Principles and the Money Stock Growth Rule," NBER Working Papers 0630, National Bureau of Economic Research, Inc.
  4. Fumio Hayashi, 1982. "The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis," NBER Working Papers 0882, National Bureau of Economic Research, Inc.
  5. Turnovsky, Stephen J, 1978. "Macroeconomic Dynamics and Growth in a Monetary Economy: A Synthesis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(1), pages 1-26, February.
  6. Alan S. Blinder, 1982. "Issues in the Coordination of Monetary and Fiscal Policy," NBER Working Papers 0982, National Bureau of Economic Research, Inc.
  7. Hamburger, Michael J. & Zwick, Burton, 1982. "Deficits, money and inflation : Reply," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 279-283.
  8. Hamburger, Michael J. & Zwick, Burton, 1981. "Deficits, money and inflation," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 141-150.
  9. Alan S. Blinder, 1982. "Issues in the coordination of monetary and fiscal policies," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 3-46.
  10. Barro, Robert J., 1978. "Comment from an unreconstructed Ricardian," Journal of Monetary Economics, Elsevier, vol. 4(3), pages 569-581, August.
  11. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  12. Tobin, James, 1981. "Money and Finance in the Macro-Economic Process," Nobel Prize in Economics documents 1981-1, Nobel Prize Committee.
  13. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  14. Niskanen, William A., 1978. "Deficits, government spending, and inflation : What is the evidence?," Journal of Monetary Economics, Elsevier, vol. 4(3), pages 591-602, August.
  15. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  16. Ben S. Bernanke, 1981. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," NBER Working Papers 0756, National Bureau of Economic Research, Inc.
  17. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  18. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
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