The Fiscal Theory Of The Price Level: A Critique

Willem Buiter

Economic Journal, 2002, vol. 112, issue 481, 459-480

Abstract: This paper argues that the "fiscal theory of the price level" (FTPL) has feet of clay. The source of the problem is a fundamental "economic" misspecification. The FTPL confuses two key building blocks of a model of a market economy: budget constraints, which must be satisfied identically, and market clearing or equilibrium conditions. The FTPL asssumes that the government"s intertemporal budget constraint needs to be satisfied only "in equilibrium". This economic misspecification has far--reaching implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. It produces a rash of contradictions and anomalies. Copyright 2002 Royal Economic Society

Date: 2002
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