1983 Articles

Money, Credit Constraints, and Economic Activity

Stiglitz, Joseph E.; Blinder, Alan S.

The article discusses about the effects of monetary policy on real variables like output and employment. In classical monetary theory, prices are fully flexible and the future tax liabilities implied by government bonds are fully discounted. In such a world, government wending has identical effects whether it is financed by bonds or by current taxation, and an open-market purchase of bonds is equivalent to a money rain. If an explicitly dynamic, general equilibrium model in which people form rational expectations about the uncertain future is constructed, a number of irrelevance theorems about government financial policy can be established, provided that financial changes do not redistribute the tax burden. A change in the rate of inflation that is matched by a change in the nominal interest paid on government debt does not disturb equilibrium in any market. A change in the maturity structure of the government debt will require a change in the term structure of interest rates to equilibrate the demands and supplies of different types of bonds.