The Central Bank, the Treasury, or the Market: Which One Determines the Price Level?

Jean Barth Lemy, Eric Mengus and Guillaume Plantin
Authors registered in the RePEc Author Service: Jean Barthélemy

Working papers from Banque de France

Abstract: This paper studies a model in which the price level is the outcome of dynamic strategic interactions between a fiscal authority, a monetary authority, and investors in government bonds and reserves. The ''unpleasant monetarist arithmetic'' whereby aggressive fiscal expansion forces the monetary authority to chicken out and inflate away public liabilities may be contained by market forces: Monetary dominance prevails if such fiscal expansion is met with a higher real interest rate on public liabilities, due for example to the crowding out of private investment opportunities. The model delivers empirical implications regarding the joint dynamics of public liabilities and price level, and policy implications regarding the management of central banks' balance sheets.

Keywords: Fiscal-Monetary Interactions; Game of Chicken (search for similar items in EconPapers)
JEL-codes: E31 E42 E50 E63 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-gth, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://publications.banque-france.fr/sites/defaul ... /documents/wp855.pdf

Related works:
Journal Article: The central bank, the treasury, or the market: Which one determines the price level? (2024)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:855

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