Staff Report 34

Open-Market Operations in a Model of Regulated, Insured Intermediaries

Neil Wallace
John Bryant

Published April 1, 1979

In “The Inefficiency of Interest-Bearing National Debt,” (JPE, April 1979) we argued that private sector transaction costs are needed in order to explain interest on government debt. It follows that if the government’s transaction costs do not depend on its portfolio, then, barring special circumstances, an open-market purchase is deflationary and welfare improving. In this paper we show that this result can survive a potentially relevant special circumstance: reserve requirements which limit the size of insured intermediaries.

Published In: Journal of Political Economy (Vol. 88, No. 1, February 1980, pp. 146-173)

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