Exchange rates and the fiscal theory of the price level

This paper addresses exchange rate determination under a nominal interest peg in a two-country cash-in-advance model. Under two types of cash-in-advance constraints, if both governments peg the nominal interest rate on domestic bonds, there is a continuum of equilibria, each consistent with different nominal exchange rates and real resource allocations. The well-known finding of equilibrium uniqueness under a nominal interest rate peg in a closed economy does not survive in a multi-country, multi-currency setting. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: E31; E52; F33.