The central bank, the treasury, or the market: Which one determines the price level?

Jean Barthélemy, Eric Mengus and Guillaume Plantin

Journal of Economic Theory, 2024, vol. 220, issue C

Abstract: This paper studies a model in which the price level is the outcome of dynamic strategic interactions between fiscal and monetary authorities that pursue distinct objectives. The “unpleasant monetarist arithmetic”, whereby aggressive fiscal expansion forces the monetary authority to chicken out and to lose control of inflation, occurs only if the public sector lacks fiscal space, in the sense that public debt along the optimal fiscal path gets sufficiently close to the threshold above which the fiscal authority would find default optimal. Otherwise, monetary dominance prevails even though the central bank has neither commitment power nor fiscal backing.

Keywords: Fiscal-monetary interactions; Game of chicken (search for similar items in EconPapers)
JEL-codes: E31 E52 E63 H63 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? (2022)
Working Paper: The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? (2022)
Working Paper: The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? (2022)
Working Paper: The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? (2021)
Working Paper: The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:220:y:2024:i:c:s0022053124000917

DOI: 10.1016/j.jet.2024.105885

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