Working Paper: NBER ID: w1106
Authors: Joseph E. Stiglitz
Abstract: This paper is concerned with delineating conditions under which public financial policies have no real and/or price effects. In the absence of intergenerational distribution effects, public financial policy is irrelevant:an increase in government debt (whether indexed or not), an exchange of anindexed bond for a non-indexed bond, or an exchange of a short term bond fora long term bond has neither real nor financial effects. We also describe changes in financial policy in which the supply of bonds are increased and the nominal interest rate increases, which have an effect on the rate of inflation, but no real effects. We examine the implications of price and wage rigidities and the existence of a non-interest bearing financial asset used for transactions purposes for the validity of these irrelevance theorems.In general, public financial policies have effects on intergenerational distribution; alternative financial policies have implications for the pattern of capital accumulation (an effect which was the center of the literature on money and growth) and on the sharing of risks among members of different generations. We examine the consequences of three alternative financial policies,a fixed supply of financial assets, a fixed price level, and a fixed real supply of government indebtedness; under some plausible conditions, the latter policy may provide for the least intergenerational variability inconsumption.
Keywords: Public Financial Policy; Indexation; Price Rigidities; Monetary Policy
JEL Codes: E31; E42; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in government debt (H63) | No real or financial effects (G19) |
| Increase in supply of government bonds (E43) | Increase in demand for those bonds (E43) |
| Public financial policy effects on intergenerational distribution of income (H60) | Influence capital accumulation patterns and risk sharing among generations (D15) |
| Certain public financial policies (H69) | Financial effects (e.g., affecting price levels) (E30) |
| Indexed bonds (G12) | Real effects when more than one type of individual alive in a generation (D15) |
| Without intergenerational redistributions (D15) | Public financial policies are irrelevant (H59) |