Working Paper: NBER ID: w9084
Authors: David B. Gordon; Eric M. Leeper
Abstract: We consider price level determination from the perspective of portfolio choice. Arbitrages among money balances, bonds, and investment goods determine their relative demands. Returns to real balance holdings (transactions services), the nominal interest rate, and after-tax returns to investment goods determine the relative values of nominal and real assets. Since expectations of government policies ultimately determine the expected returns to both nominal and real assets, monetary and fiscal policies jointly determine the price level. Special cases of the fiscal and monetary policies considered produce the quantity theory of money and the fiscal theory of the price level.
Keywords: No keywords provided
JEL Codes: E31; E41; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary and fiscal policies (E63) | price level (E30) |
| fiscal policy (E62) | price level (E30) |
| government liabilities (H69) | price level (E30) |
| monetary policy constraints (E52) | price level (E30) |
| bond-financed tax cut (H20) | nominal spending (H61) |
| nominal spending (H61) | price level (E30) |
| fiscal obligations (E62) | price level (E30) |
| expected government policies (H59) | expected returns on assets (G12) |