This book presents a modern approach to macroeconomic policy analysis. The analytical framework is non-Walrasian. The disaggregation of the government into the treasury and the central bank, and the specification of the behavior of households, firms, and the central bank as intertemporal optimizers are among the distinguishing features of the book. Its primary purpose is to introduce policy makers, economists, and advanced students to a modern theoretical framework which could serve as the basis for macroeconomic policy analysis and to introduce the concept of public sector rationing in asset markets. The detailed treatment of credit rationing regimes makes portions of the book particularly relevant to economies where the interest rate is rigid. The following policy instruments are discussed: open market operations, bond-financed change in the level of government consumption, incomes policies, interest rate regulations, interest rate targets, exchange rate targets, and money supply targets. In addition, the effects of adjustments in prices (exchange rate, bond price, and so forth) on the government's budget and the economy are highlighted.

The unique specification of the intertemporal behavior of the central bank makes intervention in asset markets (the bond market and the foreign exchange market) endogenous in the short run and allows for the introduction of the concept of public sector rationing in the asset markets. Rationing in asset markets, due to interest rate regulations or central bank optimization problems, alters the effectiveness of the treasury's policies in the short run.