DP11966 | A Central Bank Theory of Price Level Determination


Publication Date


JEL Code(s)


Programme Area(s)



The remittances’ policy and the balance sheet of the central bank are important elements to specify for the control of the price level. A central bank appropriately capitalized can succeed to control prices by setting the interest rate on reserves, holding risk-free assets and rebating its income to the treasury - from which it has to maintain financial independence. If the central bank undertakes unconventional open-market operations, either it has to give up its financial independence or leaves the economy exposed to self-fulfilling inflationary spirals or chronic liquidity traps.