Price-level determinacy without control of a monetary aggregate

Abstract

It is shown that the price level remains determinate even in the case of two kinds of radical money supply endogeneity - an interest rate peg by the central bank, and a “free banking” regime - that are commonly supposed to imply loss of control of the price level. Price level determination under such regimes can be understood in terms of a “fiscal theory of the price level,” according to which the equilibrium price level is that level that makes the real value of nominally denominated government liabilities equal to the present value of expected future government budget surpluses.