Skip to main content

Monetary Policy in the Presence of a Stochastic Deficit

Staff Report 42 | Published April 1, 1979

Download PDF

Authors

photo of Neil Wallace

Neil Wallace

John Bryant

Monetary Policy in the Presence of a Stochastic Deficit

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.