Is the Price Level Determined by the Needs of Fiscal Solvency?

CEPR Discussion Paper Series No. 1772

Posted: 25 Jun 1998

See all articles by Matthew B. Canzoneri

Matthew B. Canzoneri

Georgetown University

Robert E. Cumby

Georgetown University - Department of Economics; National Bureau of Economic Research (NBER)

Behzad Diba

Georgetown University

Multiple version iconThere are 2 versions of this paper

Date Written: January 1998

Abstract

A new theory of price determination suggests that if primary surpluses are independent of the level of debt, the price level has to jump? to assure fiscal solvency. In this regime (which we call fiscal dominant), monetary policy has to work through seignorage to control the price level. If, on the other hand, primary surpluses are expected to respond to the level of debt in a way that assures fiscal solvency (a regime we call money dominant), then the price level is determined in more conventional ways. This paper develops testable restrictions that differentiate between the two regimes. Using post-war data, the paper presents what we think is overwhelming evidence that the United States is in a money dominant regime; even the post-Reagan data (1980-95) seem to support that contention.

JEL Classification: E31, E42, E52

Suggested Citation

Canzoneri, Matthew B. and Cumby, Robert E. and Diba, Bezhad, Is the Price Level Determined by the Needs of Fiscal Solvency? (January 1998). CEPR Discussion Paper Series No. 1772. Available at SSRN: https://ssrn.com/abstract=101888

Matthew B. Canzoneri

Georgetown University ( email )

Washington, DC 20057
United States
202-687-5911 (Phone)
202-687-6102 (Fax)

Robert E. Cumby (Contact Author)

Georgetown University - Department of Economics ( email )

580 Intercultural Center
Washington, DC 20057
United States
202-687-2990 (Phone)
202-687-6102 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bezhad Diba

Georgetown University ( email )

Washington, DC 20057
United States
2026875682 (Phone)
2026876102 (Fax)

HOME PAGE: http://econ.georgetown.edu/

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