A State Theory of Price Levels

Eric Mengus, Guillaume Plantin and Jean Barthélemy
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Eric Mengus: Eric Mengus HEC Paris - Economics & Decision Sciences
Guillaume Plantin: Sciences Po
Jean Barthélemy: Bank of France

No 1604, HEC Research Papers Series from HEC Paris

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: E31 E42 E63 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2026-02-18
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1604

DOI: 10.2139/ssrn.6255080

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