The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs and Fiscal Theories of the Price Level

Willem Buiter

No 1799, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper establishes the following: First, money is neutral even if there is a non-zero stock of non-monetary nominal public debt, because the government adjusts real taxes to satisfy its inter-temporal budget constraint. Second, Woodford’s fiscal theory of the price level, according to which for certain fiscal rules the (initial) price level is independent of the nominal money stock, is invalid. It combines an overdetermined fiscal-financial programme with an unwarranted weakening of the government’s inter-temporal budget constraint, requiring it to hold only in equilibrium, and only for arbitrarily restricted configurations of public spending, taxes and initial debt stocks. Third, there is price level determinacy under an exogenous nominal interest rate rule if the transactions technology has cash-in-advance features. The price level is hysteretic in this case. Finally, it is not possible to draw inferences about the historical process of technological improvements in the transactions technology leading to a cashless economy, by studying the limiting behaviour, as a transactions efficiency index takes on successively higher values, of a sequence of histories, each one of which is indexed for all time by a given level of efficiency.

Keywords: fiscal theories of the price level; interest rate pegs; Neutrality; price level determinacy (search for similar items in EconPapers)
JEL-codes: E40 E42 E50 E58 (search for similar items in EconPapers)
Date: 1998-03
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Citations: View citations in EconPapers (43)

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Working Paper: The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs, and Fiscal Theories of the Price Level (1998)
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