Price level determinacy and monetary policy under a balanced-budget requirement

This paper analyzes the implications of a balanced-budget "scal policy rule for pricelevel determination in a cash-in-advance economy under three alternative monetary policy regimes. It shows that the price level is indeterminate under a nominal interest rate peg and determinate under a money growth rate peg. Under a feedback rule that sets the nominal interest rate as a non-negative and non-decreasing function of the in#ation rate, the price level is indeterminate for both low and high values of the in#ation elasticity of the feedback rule and determinate for intermediate values. We also study balanced-budget rules that allow for bounded secondary surpluses or de"cits. Comparing our results to those emphasized in the "scal theory of the price level, it becomes clear that a key consideration for price-level determination is whether "scal policy is speci"ed as an exogenous sequence of primary surpluses/de"cits or, alternatively, as an exogenous sequence of secondary surpluses/de"cits. ( 2000 Elsevier Science B.V. All rights reserved. JEL classixcation: E63; E52; E31