Federal deficits and the conduct of monetary policy

The persistent Federal deficits of the seventies and eighties have been accompanied by economic analysis of those deficits. One conclusion from this work is that deficits force the Federal Reserve to increase the money stock. However, empirical studies have failed to detect this link between deficits and money growth. This article attempts to resolve this contradiction through analysis of the influence of deficits on the instruments actually employed in conducting monetary policy. It is found that persistent deficits do lead to reserve growth but not through the expected interest-rate channel.