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Price Level Determinacy under a Pure Interest Rate Peg

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  • Jean-Pascal Benassy

    (CEPREMAP)

Abstract

In this article we reexamine a famous result by Sargent and Wallace (1975) according to which a "pure interest rate peg" leads to nominal price indeterminacy. We use Weil's (1991) generalization of the Sidrauski-Brock model, where arrival of new "generations" of infinitely lived agents is allowed, and we obtain the following results: (i) nominal indeterminacy holds in the traditional Sidrauski-Brock framework; (ii) This nominal indeterminacy disappears as soon as new generations arrive in time, via some rigorous version of Patinkin's "real balance effect"; (iii) A multiplicity of solutions may still remain, but full determinacy occurs in some cases, depending notably on fiscal policy or the distribution of endowments in time. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1999.0073
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 3 (2000)
Issue (Month): 1 (January)
Pages: 194-211

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Handle: RePEc:red:issued:v:3:y:2000:i:1:p:194-211

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Related research

Keywords: price determinacy; interest rate pegging;

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References

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  1. Weil, Philippe, 1991. "Is Money Net Wealth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 37-53, February.
  2. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
  3. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  4. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
  5. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  6. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
  7. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
  8. Weil, Philippe, 1987. "Permanent budget deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 393-410, September.
  9. Bennett T. McCallum, 1982. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  10. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  11. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  12. McCallum, Bennett T., 1986. "Some issues concerning interest rate pegging, price level determinacy, and the real bills doctrine," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 135-160, January.
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Citations

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Cited by:
  1. Andreas Schabert & Christian Stoltenberg, 2005. "Money Demand and Macroeconomic Stability Revisited," SFB 649 Discussion Papers SFB649DP2005-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2005.
  2. António Afonso, 2002. "Disturbing the fiscal theory of the price level: Can it fit the eu-15?," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-3, International Conferences on Panel Data.
  3. repec:hal:wpaper:halshs-00590558 is not listed on IDEAS
  4. Schabert, Andreas & von Thadden, Leopold, 2006. "Distortionary taxation, debt, and the price level," Working Paper Series 0577, European Central Bank.
  5. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  6. Rym Aloui & Michel Guillard, 2009. "A Simple “Public Debt-Deflation” Theory: Leeper revisited," Documents de recherche 09-11, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  7. Barbara Annicchiarico & Alessandro Piergallini, 2006. "Inflation Shocks and Interest Rate Rules," CEIS Research Paper 85, Tor Vergata University, CEIS.
  8. Christian Stoltenberg, 2006. "Real Balance Effects, Timing and Equilibrium Determination," SFB 649 Discussion Papers SFB649DP2006-073, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  9. Barbara Annicchiarico & Giancarlo Marini & Alessandro Piergallini, 2007. "Wealth Effects, the Taylor Rule and the Liquidity Trap," CEIS Research Paper 103, Tor Vergata University, CEIS.
  10. Laffargue, J.-P.Jean-Pierre, 2004. "A sufficient condition for the existence and the uniqueness of a solution in macroeconomic models with perfect foresight," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 1955-1975, September.
  11. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  12. repec:ebl:ecbull:v:5:y:2006:i:19:p:1-7 is not listed on IDEAS
  13. Jean-Pascal Benassy, 2005. "Interest Rate Rules, Price Determinacy and the Value of Money in a non Ricardian World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 651-667, July.

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