Optimization in a Neo-chartalist Model of the Determination of the Price Level

This paper builds on the “dual-price monopoly money” model (Levey, 2021) which demonstrates the theory of the determination of the price level put forward by Modern Monetary Theory (MMT), by adding individual optimizing behavior. This mathematization is done not for its own sake, but as an act of translation, putting heterodox concepts into a language that orthodox economic theorists might find more agreeable, though it also fills a major theoretical hole within mainstream theory. The paper looks at two forms of fiscal policy: government spending on a fixed-price/floating-quantity rule, and when the government imposes a limit on the amount it purchases. Within each category, we look at a single period and multiple period models, including graphical examples