A State Theory of Price Levels

Jean Barthélemy, Eric Mengus and Guillaume Plantin

Working papers from Banque de France

Abstract: This paper introduces a general and parsimonious framework to study whether a state can control the value of its currency by declaring it to be the legal tender for claims between itself and the private sector, and by trading it for desirable commodities according to a mechanism of its choice. In an economy in which all agents are price-setters, we identify when such policies elicit a single equilibrium price level. For policies that fail to do so, for example because different official and unofficial prices may coexist in equilibrium, we still offer tight restrictions on the set of predictable price levels. We discuss how our framework sheds light on common mechanisms driving various historical and recent forms of monetary or/and fiscal instability.

Keywords: Price Level Determination; Legal Tender; Monetary Policy; Fiscal Policy (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1023

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