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

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

No 17407, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies a political-economy 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 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.

Date: 2022-06
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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? (2021)
Working Paper: The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? (2021)
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