Price level determinacy and monetary policy under a balanced-budget requirement

Stephanie Schmitt-Grohe and Martín Uribe ()

No 1997-17, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper analyzes the implications of a balanced budget fiscal policy rule for the determinacy of the price level in a cash-in-advance economy under three alternative monetary policy regimes. It shows that, in such stylized models with flexible prices and a period-by-period balanced budget requirement, the price level is determinate under a money growth rate peg and is indeterminate under a pure nominal interest rate peg. Under a feedback rule whereby the nominal interest rate is set as an increasing function of the inflation rate, the price level is determinate for intermediate values of the inflation elasticity of the feedback rule and is indeterminate for both very low and very high values of the inflation elasticity. Finally, regardless of the particular monetary policy specification, a rational expectations equilibrium consistent with the optimal quantity of money may not exist.

Keywords: Forecasting; Monetary policy (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Price level determinacy and monetary policy under a balanced-budget requirement (2000)
Working Paper: Price Level Determinacy and Monetary Policy under a Balanced-Budget Requirement (1998)
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