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Price level determinacy and monetary policy under a balanced-budget requirement

Listed author(s):
  • Schmitt-Grohe, Stephanie
  • Uribe, Martin

This paper analyzes the implications of a balanced-budget fiscal policy rule for price-level determination in a cash-in-advance economy under three alternative monetary policy regimes. It shows that the price level is indeterminate under a nominal interest rate peg and determinate under a money growth rate peg. Under a feedback rule that sets the nominal interest rate as a non-negative and non-decreasing function of the inflation rate, the price level is indeterminate for both low and high values of the inflation elasticity of the feedback rule and determinate for intermediate values. We also study balanced-budget rules that allow for bounded secondary surpluses or deficits. Comparing our results to those emphasized in the fiscal theory of the price level, it becomes clear that a key consideration for price-level determination is whether fiscal policy is specified as an exogenous sequence of primary surpluses/deficits or, alternatively, as an exogenous sequence of secondary surpluses/deficits.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 45 (2000)
Issue (Month): 1 (February)
Pages: 211-246

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Handle: RePEc:eee:moneco:v:45:y:2000:i:1:p:211-246
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  2. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
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  15. Gilbert Ghez & Gary S. Becker, 1975. "A Theory of the Allocation of Time and Goods Over the Life Cycle," NBER Chapters,in: The Allocation of Time and Goods over the Life Cycle, pages 1-45 National Bureau of Economic Research, Inc.
  16. Canzoneri, Matthew B & Diba, Behzad, 1996. "Fiscal Constraints on Central Bank Independence and Price Stability," CEPR Discussion Papers 1463, C.E.P.R. Discussion Papers.
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