DP11966 A Central Bank Theory of Price Level Determination

Author(s): Pierpaolo Benigno
Publication Date: April 2017
Date Revised: February 2018
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11966

The remittances? policy and the balance sheet of the central bank are important elements to specify for the control of the price level. A central bank appropriately capitalized can succeed to control prices 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.