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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. Maurice Obstfeld & Kenneth Rogoff, 1982. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
  2. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
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  7. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters, in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
  8. 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..
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  11. 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.
  12. 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.
  13. Bennett T. McCallum, 1980. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
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  17. 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.
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