The backing of government bonds and monetarism

This paper examines the implications of the fiscal backing of government bonds for the effects of conventional macroeconomic policies and, in particular, for certain monetarist propositions. It shows that the validity of some basic monetarist hypotheses requires a considerable degree of accommodation by the fiscal authority, relative to the central bank. Otherwise, government bonds may matter in a manner as described in the traditional literature [e.g., Patinkin (1965), Mundell (1971)], though some differences arise. Of perhaps independent interest, the framework developed in the analysis is an intertemporal general equilibrium model with all the descriptive features of the conventional flexible price IS/LM model.