Price Level Determinancy and Nominal Interest Rate Pegging

Arthur Benavie and Richard T Froyen

Oxford Economic Papers, 1988, vol. 40, issue 4, 634-45

Abstract: Possible indeterminacy of the price level, when the nominal interest rate is arbitrarily set at some level, is of interest in monetary theory. This paper reexamines this issue within a stochastic macromodel, considering both a "pure" interest rate peg and an interest rate peg as the limiting form of two money supply rules. The analysis suggests that each method of achieving a complete interest rate peg constitutes a well-formulated monetary policy. Both result in a determinate price level and money supply. As far as the stochastic properties of the model are concerned, these strategies are shown to be equivalent. Copyright 1988 by Royal Economic Society.

Date: 1988
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