Is the Price Level Determined by the Needs of Fiscal Solvency?

Matthew Canzoneri, Robert Cumby () and Behzad Diba

American Economic Review, 2001, vol. 91, issue 5, 1221-1238

Abstract: The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level "jumps" to assure fiscal solvency. In this non-Ricardian regime, fiscal policy--not monetary policy--provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes.

JEL-codes: E31 E62 (search for similar items in EconPapers)
Date: 2001
Note: DOI: 10.1257/aer.91.5.1221
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Citations: View citations in EconPapers (275)

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Related works:
Working Paper: Is the Price Level Determined by the Needs of Fiscal Solvency? (1998)
Working Paper: Is the Price Level Determined by the Needs of Fiscal Solvency? (1998)
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