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A State Theory of Price Levels

Author

Listed:
  • Mengus, Eric

    (Eric Mengus HEC Paris - Economics & Decision Sciences)

  • Plantin, Guillaume

    (Sciences Po)

  • Barthélemy, Jean

    (Bank of France)

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

  • Mengus, Eric & Plantin, Guillaume & Barthélemy, Jean, 2026. "A State Theory of Price Levels," HEC Research Papers Series 1604, HEC Paris.
    • Handle: RePEc:ebg:heccah:1604
    DOI: 10.2139/ssrn.6255080
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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