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 that is 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.
A Central bank theory of price level determination / Benigno, Pierpaolo. - In: AMERICAN ECONOMIC JOURNAL. MACROECONOMICS. - ISSN 1945-7707. - 12:3(2020), pp. 258-283. [10.1257/mac.20190008]
A Central bank theory of price level determination
Benigno P.
2020
Abstract
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 that is 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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