TY  - JOUR
AU  - Canzoneri,Matthew B.
AU  - Cumby,Robert E.
AU  - Diba,Behzad T.
TI  - Is the Price Level Determined by the Needs of Fiscal Solvency?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6471
PY  - 1998
Y2  - March 1998
UR  - http://www.nber.org/papers/w6471
L1  - http://www.nber.org/papers/w6471.pdf
N1  - Author contact info:
Matthew Canzoneri
Department of Economics
Georgetown University
Washington, DC   20057
Tel: 202-687-5911
E-Mail: canzonem@georgetown.edu

Robert E. Cumby
Georgetown University
School of Foreign Service
Washington, DC 20057-1045
Tel: 202/687-2990
Fax: 202/687-6102
E-Mail: cumbyr@georgetown.edu

Behzad Diba
Department of Economics
Georgetown University
Washington, DC  20057
Tel: 202-687-5682
Fax: 202-687-6102
E-Mail: dibab@georgetown.edu
AB  - A new theory of price determination suggests that if primary surpluses are independent of the level of debt, the price level has to  jump' to assure fiscal solvency.  In this regime (which we call Fiscal Dominant), monetary policy has to work through seignorage to control the price level.  If on the other hand primary surpluses are expected to respond to the level of debt in a way that assures fiscal solvency (a regime we call Money Dominant), then the price level is determined in more conventional ways.  In this paper we develop testable restrictions that differentiate between the two regimes.  Using post war data, we present what we think is overwhelming evidence that the United States is in a Money Dominant regime; even the post Reagan data (1980 to 1995) seem to support that contention.
ER  -