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Price Level Determinacy Without Control of a Monetary Aggregate

  • Michael Woodford

It is shown that the price level remains determinate even in the case of two kinds of radical money supply endogeneity -- an interest rate peg by the central bank, and a 'free banking' regime -- that are commonly supposed to imply loss of control of the price level. Price level determination under such regimes can be understood in terms of a 'fiscal theory of the price level,' according to which the equilibrium price level is that level that makes the real value of nominally denominated government liabilities equal to the present value of expected future government budget surpluses. The application of the fiscal theory of the price level to exogenous-money regimes is sketched as well.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5204.

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Date of creation: Aug 1995
Date of revision:
Publication status: published as Carnegie-Rochester Conference Series on Public Policy, Vol. 43, (December 1995): pp. 1-46.
Handle: RePEc:nbr:nberwo:5204
Note: EFG ME
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  1. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August.
  3. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  4. 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.
  5. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  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. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-81, April.
  8. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
  9. Rao Aiyagari, S. & Gertler, Mark, 1985. "The backing of government bonds and monetarism," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 19-44, July.
  10. John H. Boyd & Michael Dotsey, 1990. "Interest rate rules and nominal determinacy," Working Paper 90-01, Federal Reserve Bank of Richmond.
  11. N. Gregory Mankiw, 1987. "The Optimal Collection of Seigniorage: Theory and Evidence," NBER Working Papers 2270, National Bureau of Economic Research, Inc.
  12. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  13. Blinder, Alan S. & Solow, Robert M., 1976. "Does fiscal policy still matter? : A reply," Journal of Monetary Economics, Elsevier, vol. 2(4), pages 501-510, November.
  14. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  15. Scarth, William M., 1980. "Rational expectations and the instability of bond-financing," Economics Letters, Elsevier, vol. 6(4), pages 321-327.
  16. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
  17. 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.
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