Index-linked government bonds and the efficiency of monetary policy

This essay considers James Tobin's suggestion that the introduction of index-linked government bonds could make monetary policy more efficient. A macroeconomic model incorporating a given state of expectations and uncertainty is used to show that there should be no systematic difference between the effects of a given monetary policy shift in a regime in which government bonds are index-linked and in a regime in which government bonds are nominal. Monetary policy could have different effects in the two regimes when the model is complicated to allow the monetary policy shift to generate changes in the state of expectations and uncertainty; even so, it is impossible to say a priori in which regime monetary policy would be more efficient.