Journal Article Expectations and the Dynamics of Devaluation Get access Stephen J. Turnovsky Stephen J. Turnovsky Australian National University Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 4, July 1980, Pages 679–704, https://doi.org/10.2307/2296936 Published: 01 July 1980 Article history Received: 01 May 1978 Accepted: 01 October 1979 Published: 01 July 1980

This paper presents a procedure for determining the optimal monetary aggregate for stabilization policy. To illustrate the procedure, a simple stochastic IS-LM model is used, and how, in general, stabilizing an aggregate consisting of both money and interest bearing government debt will provide superior stabilization for output is shown. The relative weight given to the two components in the aggregate may vary widely, depending upon the source of random disturbances in the economy. Also, for a specific weight, stabilizing the aggregate is equivalent to stabilizing the interest rate. Finally, we show how stabilizing the aggregate is equivalent to other forms of optimal monetary policy proposed by Poole, and Kareken, Muench, and Wallace.

This paper evaluates the benefits to consumers from price stabilization in terms of the convexity-concavity properties of the consumer's indirect utility function. It is shown that in the case where only a single commodity price is stabilized, the consumer's preference for price instability depends upon four parameters: the income elasticity of demand for the commodity, the price elasticity of demand, the share of the budget spent on the commodity, and the coefficient of relative risk aversion. All of these parameters enter in an intuitive way and the analysis includes the conventional consumer's surplus approach as a special case. The analysis is extended to consider the benefits of stabilizing an arbitrary number of commodity prices. Finally, some issues related to the choice of numeraire and certainty price in this context are discussed.