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

38 Pages Posted: 26 Jul 2000 Last revised: 9 Oct 2010

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: March 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. In this paper we develop testable restrictions that differentiate between the two regimes. Using post war data, we present what we think is overwhelming evidence that the United States is in a Money Dominant regime; even the post Reagan data (1980 to 1995) seem to support that contention.

Suggested Citation

Canzoneri, Matthew B. and Cumby, Robert E. and Diba, Bezhad, Is the Price Level Determined by the Needs of Fiscal Solvency? (March 1998). NBER Working Paper No. w6471. Available at SSRN: https://ssrn.com/abstract=226216

Matthew B. Canzoneri (Contact Author)

Georgetown University ( email )

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Robert E. Cumby

Georgetown University - Department of Economics ( email )

580 Intercultural Center
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National Bureau of Economic Research (NBER)

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Bezhad Diba

Georgetown University ( email )

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United States
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