The paper establishes the following: First, money is neutral even if there is a non-zero stock of non-monetary nominal public debt, because the government adjusts real taxes to satisfy its intertemporal budget constraint. Second, Woodford's fiscal theory of the price level, according to which for certain fiscal rules the (initial) price level is independent of the nominal money stock, is invalid. It combines an overdetermined fiscal-financial program with an unwarranted weakening of the government's intertemporal budget constraint, requiring it to hold only in equilibrium, and only for arbitrarily restricted configurations of public spending, taxes and initial debt stocks. Third, there is price level determinacy under an exogenous nominal interest rate rule if the transactions technology has cash-in-advance features. The price level is hysteretic in this case. Finally, it is not possible to draw inferences about the historical process of technological improvements in the transactions technology leading to a cashless economy, by studying the limiting behavior, as a transactions efficiency index takes on successively higher values of a sequence of histories, each one of which is indexed for all time by a given level of efficiency.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6396.
Length: Date of creation: Feb 1998 Date of revision: Handle: RePEc:nbr:nberwo:6396
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Find related papers by JEL classification: E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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