A Requiem for the Fiscal Theory of the Price Level

Roger Farmer and Pawel Zabczyk

No 2019/219, IMF Working Papers from International Monetary Fund

Abstract: The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.

Keywords: WP; price level; fiscal policy; monetary policy; fiscal theory of the price level; price level determination; overlapping generations model; dynamic efficiency; accumulation equation; equilibrium debt dynamics; fiscal policy regime; valuation equation; steady-state price level; equilibrium equation; debt valuation equation; excess demand; debt accumulation equation; Real interest rates; Overlapping generations models; Negative interest rates; Global (search for similar items in EconPapers)
Pages: 34
Date: 2019-10-11
New Economics Papers: this item is included in nep-dge and nep-mon
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Citations: View citations in EconPapers (8)

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