Money as Stock

Nominal government debt, including the monetary base, is a residual claim to government surpluses. Thus, the value of Þat money can be determined in a completely frictionless economy, just like the price of stock. The main theoretical objection to this Þscal theory of the price level is that it mistreats the government’s intertemporal budget constraint. I show that the valuation equation for nominal government debt is not, in fact, a budget constraint. Most clearly, a corporation can double shares without changing earnings. This is a stock split and halves the stock price. Similarly, the government can double debt with no change in surpluses. This is a currency reform, and doubles the price level. You cannot double your demand for tomatoes, counting on the price to halve. Thus, if a currency reform is possible, the nominal debt valuation equation is not a budget constraint. I anchor this analysis in a simple cash in advance model. I makes one one small modiÞcation: I reopen the security market at the end of the day. With this modiÞcation, overnight money demand is precisely zero. I show that the price level is still determined, however, by the government debt valuation equation. This model shows that the value of unconvertible Þat money can be determined with no money demand as well as with elastic supply.