Price Level Determinacy under a Pure Interest Rate Peg

Jean-Pascal Benassy ()

Review of Economic Dynamics, 2000, vol. 3, issue 1, pages 194-211

Abstract: In this article we reexamine a famous result by Sargent and Wallace (1975) according to which a "pure interest rate peg" leads to nominal price indeterminacy. We use Weil's (1991) generalization of the Sidrauski-Brock model, where arrival of new "generations" of infinitely lived agents is allowed, and we obtain the following results: (i) nominal indeterminacy holds in the traditional Sidrauski-Brock framework; (ii) This nominal indeterminacy disappears as soon as new generations arrive in time, via some rigorous version of Patinkin's "real balance effect"; (iii) A multiplicity of solutions may still remain, but full determinacy occurs in some cases, depending notably on fiscal policy or the distribution of endowments in time. (Copyright: Elsevier)

Keywords: price determinacy; interest rate pegging (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2000
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