Money as Stock: Price Level Determination with no Money Demand
I show that a determinate, finite price level can be achieved in an economy with no monetary frictions, and no commodity standard or other explicit redemption commitment. I make one small modification to a standard cash in advance model: I reopen the security market at the end of the day. With this modification, overnight money demand is precisely zero. I show that the price level is still determined, however, by the government debt valuation equation. Nominal government debt is, despite appearances, a residual claim to government surpluses. Thus, the price level is determined just like the price of stock, and just as if we used (say) Microsoft stock as numeraire, unit of account, and medium of exchange. I resolve Buiter's (1999) criticism that fiscal price level determination mis-treats the government budget constraint. The government is not forced by a budget constraint to raise surpluses in response to an off-equilibrium deflation, just as Microsoft is not forced to raise earnings if there is a bubble in its stock price. I also address McCallum's (1998) criticism that fiscal models do not properly treat indeterminacies, and a number of other confusions and misconceptions surrounding fiscal price level determination. I provide a taxonomy of fiscal and monetary regimes.
|Date of creation:||Jan 2000|
|Publication status:||published as John H. Cochrane, 2005. "Money as stock," Journal of Monetary Economics, vol 52(3), pages 501-528.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Willem H. Buiter, 1998.
"The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs, and Fiscal Theories of the Price Level,"
NBER Working Papers
6396, National Bureau of Economic Research, Inc.
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- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
- Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January. Full references (including those not matched with items on IDEAS)
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