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On the Monetization of Deficits

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  • Alan S. Blinder

Abstract

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.

Suggested Citation

  • Alan S. Blinder, 1982. "On the Monetization of Deficits," NBER Working Papers 1052, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1052
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    References listed on IDEAS

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    1. Hamburger, Michael J. & Zwick, Burton, 1981. "Deficits, money and inflation," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 141-150.
    2. 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..
    3. 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.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    5. Blinder, Alan S, 1981. "Temporary Income Taxes and Consumer Spending," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 26-53, February.
    6. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    7. Tobin, James, 1982. "Money and Finance in the Macroeconomic Process," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 171-204, May.
    8. 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.
    9. 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.
    10. McCallum, Bennett T, 1981. "Monetarist Principles and the Money Stock Growth Rule," American Economic Review, American Economic Association, vol. 71(2), pages 134-138, May.
    11. Fumio Hayashi, 1982. "The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis," NBER Working Papers 0882, National Bureau of Economic Research, Inc.
    12. Barro, Robert J., 1978. "Comment from an unreconstructed Ricardian," Journal of Monetary Economics, Elsevier, vol. 4(3), pages 569-581, August.
    13. Alan S. Blinder, 1982. "Issues in the Coordination of Monetary and Fiscal Policy," NBER Working Papers 0982, National Bureau of Economic Research, Inc.
    14. 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.
    15. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    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. Hamburger, Michael J. & Zwick, Burton, 1982. "Deficits, money and inflation : Reply," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 279-283.
    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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    Cited by:

    1. Daniel L. Thornton, 2010. "Monetizing the debt," Economic Synopses, Federal Reserve Bank of St. Louis.
    2. Preston J. Miller, 1983. "Higher deficit policies lead to higher inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    3. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
    4. Rudi Dornbusch, 1996. "Debt and Monetary Policy: The Policy Issues," NBER Working Papers 5573, National Bureau of Economic Research, Inc.
    5. Ronald Hoffman & Mickey D. Levy, 1984. "Economic And Budget Issues For Deficit Policy," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 96-114, September.
    6. Michael Massourakis & Farahmand Rezvani & Tadashi Yamada, 1984. "Occupation, Race, Unemployment and Crime In a Dynamic System," NBER Working Papers 1256, National Bureau of Economic Research, Inc.

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