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A Monetary-Fiscal Theory of the Price Level

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  • David Miller

    (Federal Reserve Board)

Abstract

Treating nominal government bonds as safe assets leads to a new theory of the price level. Holmstrom (2015) and Gorton (2017) define safe assets as having opaque backing with costly-to-forecast returns. I confirm this definition's empirical implications for government bonds, and analyze the theoretical implications. Government bonds' nominal return is their face value, however their real return is determined by the government's surplus. While consumers hold uninformed beliefs about the surplus, the monetary authority exerts control of the price level. In troubled times, the fiscal authority exerts control as consumers worry about default and pay a high cost to accurately forecast the surplus.

Suggested Citation

  • David Miller, 2019. "A Monetary-Fiscal Theory of the Price Level," 2019 Meeting Papers 613, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:613
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    References listed on IDEAS

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    1. Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, American Economic Association, vol. 107(4), pages 1005-1029, April.
    2. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    3. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
    4. Gary Gorton, 2017. "The History and Economics of Safe Assets," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 547-586, September.
    5. Bengt Holmstrom, 2015. "Understanding the role of debt in the financial system," BIS Working Papers 479, Bank for International Settlements.
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