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THE PRICE LEVEL, THE QUANTITY THEORY OF MONEY, AND THE FISCAL THEORY OF THE PRICE LEVEL
Author(s) -
Gordon David B.,
Leeper Eric M.
Publication year - 2006
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2006.00368.x
Subject(s) - economics , price level , investment (military) , monetary economics , portfolio , relative price , balance (ability) , bond , microeconomics , financial economics , finance , medicine , politics , political science , law , physical medicine and rehabilitation
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.