Working Paper: CEPR ID: DP1799
Authors: Willem H. Buiter
Abstract: The paper establishes the following: First, money is neutral even if there is a non-zero stock of non-monetary nominal public debt, because the government adjusts real taxes to satisfy its inter-temporal budget constraint. Second, Woodford?s fiscal theory of the price level, according to which for certain fiscal rules the (initial) price level is independent of the nominal money stock, is invalid. It combines an overdetermined fiscal-financial programme with an unwarranted weakening of the government?s inter-temporal budget constraint, requiring it to hold only in equilibrium, and only for arbitrarily restricted configurations of public spending, taxes and initial debt stocks. Third, there is price level determinacy under an exogenous nominal interest rate rule if the transactions technology has cash-in-advance features. The price level is hysteretic in this case. Finally, it is not possible to draw inferences about the historical process of technological improvements in the transactions technology leading to a cashless economy, by studying the limiting behaviour, as a transactions efficiency index takes on successively higher values, of a sequence of histories, each one of which is indexed for all time by a given level of efficiency.
Keywords: neutrality; price level determinacy; interest rate pegs; fiscal theories of the price level
JEL Codes: E40; E42; E50; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money neutrality (E19) | adjustment of real taxes (H29) |
| adjustment of real taxes (H29) | satisfaction of government's intertemporal budget constraint (H60) |
| fiscal rules (E62) | price level independence (E30) |
| exogenous nominal interest rate rule (E43) | price level determinacy (E30) |
| transactions technology (cash-in-advance features) (E42) | price level outcomes (E30) |
| Woodford's fiscal theory of the price level (E62) | overdetermined fiscal program (E62) |
| overdetermined fiscal program (E62) | weakened government's intertemporal budget constraint (H60) |