Working Paper: NBER ID: w12089
Authors: Bennett T. McCallum; Edward Nelson
Abstract: The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
Keywords: No keywords provided
JEL Codes: E5; E6; D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Price levels (E30) |
| Government debt levels (H63) | Price level determination (E30) |
| Fiscal policy (E62) | Inflation dynamics (E31) |
| Fiscal variables (E62) | Explosive behavior in price levels (E32) |
| Monetary policy rule's response to fiscal variables (E62) | Inflation outcomes (E31) |
| Bond stock behavior (G12) | Price level paths (E30) |
| FTPL equilibria (F16) | Monetarist equilibria (E19) |