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Title: A Central Bank Theory of Price Level Determination

Author(s): Pierpaolo Benigno

Publication Date: April 2017


Programme Area(s): Monetary Economics and Fluctuations

Abstract: A theory in which the central bank controls the price level is put forward as an alternative to the fiscal theory of the price level. It is not necessary to have a fiscal stimulus to avoid liquidity traps nor a fiscal anchor to disallow inflationary spirals. A central bank appropriately capitalized can succeed to control the price level by setting the interest rate on reserves, holding risk-free assets and rebating its income to the treasury -- from which it has to maintain financial independence. If the central bank undertakes unconventional open-market operations, either it has to give up its financial independence or leaves the economy exposed to self-fulfilling inflationary spirals or chronic liquidity traps.

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Bibliographic Reference

Benigno, P. 2017. 'A Central Bank Theory of Price Level Determination'. London, Centre for Economic Policy Research.