On Macro-economic Instability under a Monetarist Policy Rule in a Federal Economy

Ronald Kneebone

Canadian Journal of Economics, 1989, vol. 22, issue 3, 673-85

Abstract: The feasibility of a monetarist policy rule has been the subject of a good deal of research, all of which has implicitly assumed a unitary state. In this paper, the question is reexamined for the case of a federal state with deficit-financing nonfederal governments. The results of the paper indicate that the decision of nonfederal governments to deficit finance significantly lessens the feasibility of the monetaries policy rule and that this conclusion is true regardless of the degree to which economic agents perceive government debt as comprising a part of net wealth.

Date: 1989
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