THE PRICE LEVEL, THE QUANTITY THEORY OF MONEY, AND THE FISCAL THEORY OF THE PRICE LEVEL |
| |
Authors: | David B. Gordon Eric M. Leeper |
| |
Affiliation: | Clemson University; Indiana University and NBER |
| |
Abstract: | This paper examines 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 and after‐tax returns to investment goods determine the relative values of nominal and real assets. Because expectations of government policies ultimately determine the expected returns to both nominal and real assets, the price level depends on interactions among current and expected future monetary and fiscal policies. The quantity theory and the fiscal theory emerge as special cases produced by restricting both the margins and the policies considered. |
| |
Keywords: | Monetary Policy Fiscal Policy Quantity Theory Fiscal Theory Price Level Determination Money Demand |
|