Long-Term Public Debt and the Fiscal Theory of the Price Level

Pietro Reichlin and Gaetano Bloise

No 5479, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E31 E42 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-mac and nep-pbe
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