The Debt Money Ratio: What Are the Limits?
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While the consequences of government deficits on the economy has been a continuing concern in the economic literature, the recent large increase in the US federal budget deficits has renewed interest in the topic. Most of the studies have concentrated on the same questions; one of them concerns the possible ways of financing the deficit. In general, a government deficit must be financed by selling bonds and printing money. The issue is: Can the monetary authority choose the trajectory of the money supply without considering the size of the deficit? The answer depends upon the feasibility of financing the deficit by selling bonds only. If this is possible, the money supply can be held constant in the presence of a government deficit and the monetary authorities do not need to accommodate fiscal deficits.
KeywordsMarginal Utility Money Supply Real Interest Rate Transversality Condition Government Bond
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