Monetary Policy in the Presence of a Stochastic Deficit

Creator Series Issue number
  • 042
Date Created
  • 1979-04
  • 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.

Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department
  • Federal Reserve Bank of Minneapolis
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