The Indeterminacy of Prices under Interest Rate Pegging: The Non-Ricardian Case

This paper investigates the issue of price level indeterminacy under a pure interest rate peg in models that depart from standard Ricardian assumptions. Using a monetary version of Blanchard's finite horizons model, I find wealth effects operating on government bonds are not sufficient to determine a unique price level. Next, I consider price determination under a non-Ricardian fiscal authority. I show that, if agents rationally perceive the possibility of fiscal default, the price level is again indeterminate. I conclude that departures from Ricardian equivalence are not sufficient to ensure a unique price level under a monetary policy of pure interest rate pegging.

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	Cushing, Matthew J Professor of Economics Expertise: Monetary Policy Public Finance Econometrics Economics CBA 352 P.O. Box 880489 University of Nebraska-Lincoln Lincoln, NE 68588-0489, USA Phone: (402) 472-2323 Fax: (402) 472-9700 mcushing1@unl.edu	Cushing, Matthew J	Economics