DP11966 A Central Bank Theory of Price Level Determination
Author(s): | Pierpaolo Benigno |
Publication Date: | April 2017 |
Date Revised: | February 2018 |
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Programme Areas: | Monetary Economics and Fluctuations |
Link to this Page: | www.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.