Establishing a form of Say’s law for government debt, Stiglitz (1988a) showed that if the government reduced taxes and increased its debt, the demand for government bonds increased by an amount exactly equal to the increase in supply.
Furthermore, a change in the term structure of government debt has no effects. Of course, like any theorem, there were assumptions that went into the analysis. These seemed to be of two sorts: some, like the absence of distortionary tax affects, while they would alter the qualitative result that taxes had no effect, seemed an implausible basis for an argument about why monetary policy should be important: surely its effectiveness did not hinge on the real effects produced by the difference in the change in the dead weight losses arising from an increase in taxes in one year compensated by a decrease in taxes in some later years! Another assumption in the analysis was the absence of intergenerational redistributive effects. While one might agree or disagree with Barro (1974) that the economy is best modeled as a set of dynastic families, with no intergenerational effects, surely short run monetary policy does not hinge on these intergenerational effects.
The other set of assumptions—concerning perfect capital markets (though the analysis does not require there be a complete set of risk and futures markets)—was no different from that assumed in conventional economic models. If that assumption were struck down, with it would fall much of the standard theory. Of course, practical people have long claimed that economists’ models of capital market are unrealistic, and a host of institutional economists (and theoretical economists, when they found it convenient) have made use of the imperfect capital markets assumption. However, higher minded economists have looked derisively at those who made reference to imperfect capital markets, accusing them of, among other sins, ad hocery.
Thank You For Reading The Wavering Case For The Irrelevance Of Money
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