Money as Stock: Price Level Determination with no Money Demand

John Cochrane

No 7498, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I show that a determinate, finite price level can be achieved in an economy with no monetary frictions, and no commodity standard or other explicit redemption commitment. I make one small modification to a standard cash in advance model: I reopen the security market at the end of the day. With this modification, overnight money demand is precisely zero. I show that the price level is still determined, however, by the government debt valuation equation. Nominal government debt is, despite appearances, a residual claim to government surpluses. Thus, the price level is determined just like the price of stock, and just as if we used (say) Microsoft stock as numeraire, unit of account, and medium of exchange. I resolve Buiter's (1999) criticism that fiscal price level determination mis-treats the government budget constraint. The government is not forced by a budget constraint to raise surpluses in response to an off-equilibrium deflation, just as Microsoft is not forced to raise earnings if there is a bubble in its stock price. I also address McCallum's (1998) criticism that fiscal models do not properly treat indeterminacies, and a number of other confusions and misconceptions surrounding fiscal price level determination. I provide a taxonomy of fiscal and monetary regimes.

JEL-codes: F3 (search for similar items in EconPapers)
Date: 2000-01
New Economics Papers: this item is included in nep-mon
Note: AP ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Published as John H. Cochrane, 2005. "Money as stock," Journal of Monetary Economics, vol 52(3), pages 501-528.

Downloads: (external link)
http://www.nber.org/papers/w7498.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:7498

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w7498

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().