Price-Level Determination When Tax Payments Are Required in Money*

Abstract

Can the price level be determined by a requirement that taxes should be paid in money? We study this question in a dynamic endowment economy where households have to pay a money tax of a fixed real value and money enters the economy through government expenditures and open market operations. When government expenditures only consist of purchases of real goods, the price level is bounded from above, but not uniquely determined. A unique price level can be obtained if the government also has access to money transfers, and uses these to fix its expenditure level in nominal terms.