A Central Bank Theory of Price Level Determination
- American Economic Journal: Macroeconomics (Forthcoming)
This paper develops a theory in which the central bank can control
the price level without fiscal backing. It is shown that the remittances' policy and the balance sheet of the central bank are important elements to specify. A central bank appropriately capitalized
can succeed in controlling prices by setting the interest rate on reserves, holding short-term assets and rebating its income to the
treasury – from which it has to maintain financial independence.
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