Https://www.boj.or.j P/research/brp/ron_2 002/data/ron0207a.pd F.pdf

The stability of prices, meaning a state without inflation or deflation, is a crucial condition for achieving sustainable economic growth. The price level is influenced by various factors, but in the long run, the central bank's interest rate operations and the resulting changes in the money supply are key determinants. This view is known as the "Monetary View" and is also referred to as the idea that "inflation is a monetary phenomenon." In contrast, a new theory called the "Fiscal Theory of the Price Level" has been discussed in academic circles, which argues that "inflation is not a monetary phenomenon, but a fiscal phenomenon," referred to as the "Fiscal View."

The Monetary View suggests that an independent central bank is a sufficient condition for price stability, and many countries have strengthened the independence of their central banks since the 1990s. However, it is also recognized that some kind of restraint or rule is necessary for fiscal authorities to achieve price stability. The Fiscal View, on the other hand, emphasizes the importance of fiscal policy in determining the price level.

The relationship between the government, central bank, and private sector is crucial in understanding the differences between the Monetary View and the Fiscal View. The government, central bank, and private sector interact through markets, including the money market, bond market, and goods market. The central bank supplies money through open market operations, which affect the private sector's holdings of bonds and money.

The budget constraint of the private sector can be represented by an equation that shows how the sector allocates its resources between consumption, saving, and taxation. The government's budget constraint can also be represented by an equation that shows how the government finances its expenditures through taxation, borrowing, and money creation.

The Fiscal View emphasizes the importance of the government's budget constraint in determining the price level, while the Monetary View emphasizes the role of the central bank's monetary policy. The two views are not mutually exclusive, and a combination of both may provide a more complete understanding of the determinants of the price level.

The article discusses the implications of the Fiscal View for the conduct of monetary policy and the role of the central bank in achieving price stability. It also highlights the importance of considering the interactions between the government, central bank, and private sector in understanding the determinants of the price level.

Overall, the article provides an overview of the Monetary View and the Fiscal View, and discusses the implications of these views for our understanding of the determinants of the price level and the conduct of monetary policy.