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A State Theory of Price Levels

Author

Listed:
  • Jean Barthélemy
  • Eric Mengus
  • Guillaume Plantin

Abstract

This paper introduces a general and parsimonious framework to study whether a state can control the value of its currency by declaring it to be the legal tender for claims between itself and the private sector, and by trading it for desirable commodities according to a mechanism of its choice. In an economy in which all agents are price-setters, we identify when such policies elicit a single equilibrium price level. For policies that fail to do so, for example because different official and unofficial prices may coexist in equilibrium, we still offer tight restrictions on the set of predictable price levels. We discuss how our framework sheds light on common mechanisms driving various historical and recent forms of monetary or/and fiscal instability.

Suggested Citation

  • Jean Barthélemy & Eric Mengus & Guillaume Plantin, 2025. "A State Theory of Price Levels," Working papers 1023, Banque de France.
    • Handle: RePEc:bfr:banfra:1023
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    File URL: https://www.banque-france.fr/system/files/2025-12/WP1023.pdf
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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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