Can the price level be determined by a requirement that taxes should be paid in money? We study this question in a dynamic endowment economy where households have to pay a money tax of a fixed real value and money enters the economy through government expenditures and open market operations. When government expenditures only consist of purchases of real goods, the price level is bounded from above, but not uniquely determined. A unique price level can be obtained if the government also has access to money transfers, and uses these to fix its expenditure level in nominal terms.
Bibliographical noteFunding Information:
We would like to thank three anonymous referees as well as Marco Bassetto, John Hassler, Per Krusell, Dirk Niepelt, José‐Víctor Ríos‐Rull, Kenneth Rogoff, and seminar participants for useful comments and questions. We gratefully acknowledge financial support from Handelsbanken's Research Foundations. All errors are our own.
© 2020 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of Föreningen för utgivande av SJE/The editors of The Scandinavian Journal of Economics
- Equilibrium determinacy
- fiscal theory of the price level
- money demand
- price level