I. Relationship of foreign exchange prices and interest rates under risk neutrality, 303. — II. An application of the model to fixed spot rates, 305. — III. Conclusion, 309.

This study reformulates the National Income Accounts definitions of the government deficit and surplus and gross private saving. These new definitions are based on employing the change in the real value of government debt, due to price and interest rate changes, as a measure of the real deficit rather than the real value of the nominal debt change, as is now calculated by the Department of Commerce. The two definitions are identical if government debt were fully indexed. The major empirical differences in the revised statistics are a larger deficit during the Depression years and a much smaller deficit during inflationary periods, particularly during World War II and recent years. During the last decade the government has actually run substantial surpluses in real terms despite the cash deficits reported by the Department of Commerce. The redefined gross private saving ratio is reduced in periods of inflation and displays the same variability as the national savings rate instead of the significantly lower variability reported by the traditional statistics. In the post-War data, there is a significant negative correlation between the national saving rate and the reformulated gross private savings ratio.

A stochastic financial model is developed which derives the reserve levels on financial assets which minimize price level fluctuations. It is shown that these levels of reserves are a function of the structure of unanticipated shocks to asset demands and are, in general, quite different from the levels which minimize the fluctuations of either the nominal or real value of these assets. Application of the model to currency and demand deposits in the U.S.A. suggest that the price‐Stablizing reserve ratio on demand deposits is approximately one‐half of the 12% currently mandated by the Monetary Control Act of 1980.

Massachusetts Institute of Technology. Dept. of Economics. Thesis. 1971. Ph.D.