Walras' Law in stochastic macro models. The example of the optimal monetary instrument.

This note demonstrates that the shocks explicitly modeled as well as those implicitly present in stochastic macro-models must obey a restriction derived from Walras' law. In the standard case of statistical independence of real and monetary shocks there must be a financial shock to bond demand that mirrors those shocks, bond holdings thus acting in fact as buffer stocks. As an example the choice of the optimal monetary instrument is examined for the converse case of buffer-stock money and compared with the standard case.