Fiscal Theory of the Price Level in Small and Open Economies

Juan Pablo Di Iorio () and Javier García-Cicco ()
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Juan Pablo Di Iorio: Universidad de San Andrés
Javier García-Cicco: Universidad de San Andrés
Authors registered in the RePEc Author Service: Javier Garcia Cicco

No 179, Working Papers from Universidad de San Andres, Departamento de Economia

Abstract: A salient feature of many emerging and developing economies is that a substantial fraction of government debt is denominated in foreign currency. We study the implications of the Fiscal Theory of the Price Level (FTPL) in a standard New Keynesian small and open economy model, with an explicit role for the currency denomination of public debt. We show that, while the classical FTPL characterization of equilibrium existence and uniqueness extends largely independently of debt composition, the propagation of shocks does not. The currency denomination of public liabilities alters the effects of monetary and fiscal policy, including the possibility that a monetary tightening leads to a depreciation under active fiscal regimes. More broadly, the interaction between the fiscal-monetary policy mix and the share of foreign-currency debt also plays a central role in shaping the response to external shocks.

Keywords: Fiscal theory of the price level; inflation; exchange rate; fiscal and monetary policy interactions; currency composition of government debt (search for similar items in EconPapers)
JEL-codes: E31 E52 E63 F41 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2026-02, Revised 2026-02
New Economics Papers: this item is included in nep-dge and nep-mon
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https://repec.udesa.edu.ar/pub/econ/doc179.pdf First version, February 2026 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:sad:wpaper:179

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