Price Level Determinacy and Monetary

This paper analyzes the implications of a balanced budget scal policy rule for the determi-nacy of the price level in a cash{in{advance economy under three alternative monetary policy regimes. It shows that in such stylized models with exible prices and a period{by{period balanced budget requirement the price level is determinate under a money growth rate peg and is indeterminate under a pure nominal interest rate peg. Under a feedback rule whereby the nominal interest rate is set as an increasing function of the innation rate the price level is determinate for intermediate values of the innation elasticity of the feedback rule and is indeterminate for both very low and very high values of the innation elasticity. Finally, regardless of the particular monetary policy speciication, a rational expectations equilibrium consistent with the optimal quantity of money may not exist. The opinions expressed in this paper are those of the authors and do not necessarily reeect views of the Board of Governors of the Federal Reserve System or other members of its staa. Address for correspondence: Board of Governors of the Federal Reserve System, Washington DC 20551; [email protected] or [email protected].