This paper explores the implications of a new theory of price determination (due to Leeper, Woodford and Sims) for the maintenance of various exchange rate systems – crawling pegs, fixed pegs, and common currency areas. It shows that deeper monetary integration requires more fiscal discipline,...

It is commonly asserted that monetary and fiscal policy may have to be coordinated if they are to provide a nominal anchor and avoid the pathological outcomes of sunspots or explosive price paths. In this paper, we study a model in which government bonds are an imperfect substitute for money in...

The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, the model implies that the relative price of non-traded goods in each country should reflect the relative productivity of labour in the traded and...

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,...

Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modelled. Critics contend that these models are incomplete and unsuitable for...

We investigate the pricing of ‘Brady’ bonds that are issued by the governments of five developing countries as part of debt and debt service reduction agreements. We first present a measure of credit quality that takes account of the individual features of each bond and is comparable across...

Recent empirical tests of dynamic optimal seigniorage models focus on their `smoothing' and long-run implications. The models also imply that the optimal policies are forward looking; that is seigniorage revenues depend on expected future government expenditures. We report causality tests of...

We use a new theory of price determination – developed by Woodford, Simms and others – to characterize central bank independence and price stability. If fiscal policy guarantees that the price level is determined independently of government’s present value budget constraint, we can say...

While overall inflation has fallen dramatically in countries like Italy and Spain, inflation in the home good sector remains stubbornly higher than inflation in the traded good sector. If nominal exchange rates are fixed, these real appreciations imply an inflation differential with countries...

The Great Recession, and the fiscal response to it, has revived interest in the size of fiscal multipliers. Standard business cycle models have difficulties generating multipliers greater than one. And they also cannot produce any significant state-dependence in the size of the multipliers over...