Working Paper: CEPR ID: DP5479
Authors: Gaetano Bloise; Pietro Reichlin
Abstract: The fiscal theory of the price level asserts that the price level is determined by the ratio of outstanding public nominal debt into the present value of real primary budget surpluses of the government. We here argue that the logic of the fiscal theory fails when at least part of the public debt takes the form of securities of infinite maturity. Indeed, no equilibrium restriction prevents the occurrence of a speculative bubble on long-term public debt, so as to balance public budget intertemporally in the case of an unexpected increase in the price level. Thus, the price level is indeterminate.
Keywords: fiscal policy; fiscal theory of the price level; indeterminacy; monetary policy; public debt
JEL Codes: E31; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public nominal debt (H63) | price level (E30) |
| real primary budget surpluses (H62) | price level (E30) |
| public nominal debt (H63) | real primary budget surpluses (H62) |