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Fiscal Policy in a Monetarist Model

Staff Report 67 | Published August 1, 1982

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Author

Preston J. Miller Former Vice President and Monetary Adviser

Fiscal Policy in a Monetarist Model

Abstract

In a model which exhibits many monetarist properties it is shown that monetary and fiscal policies must be coordinated. The model is populated by overlapping generations of three-period lived agents who can hold fiat money, fiat bonds, and physical capital. A government produces a public good and issues both money and fiat bonds to finance permanent budget deficits. In this model both fiat money and fiat bonds can have value in equilibrium, and their co-existence can allow a more efficient financing of deficits than can a single debt instrument.