Cochrane's Defence of the Fiscal Theory of the Price Level: Clarification and Critique

Colin Rogers ()
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Colin Rogers: School of Economics, University of Adelaide

No 2006-03, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: Cochrane (2005) employs a well specified Walrasian general equilibrium model to defend the fiscal theory of the price level against two forms of criticism; that: (1) it implies the violation of Walras's Law and, (2) the completely cashless, frictionless version of the model cannot determine the price level. Of the two criticisms only the second is substantive. This paper explains why no version of Cochrane's model offers a theory of the price level. The model can determine the consumption good value of an asset and a numeraire denominated price level. A numeraire denominated price level is of no theoretical significance.

Keywords: frictionless; cashless; fiscal theory of price level; Walras's law (search for similar items in EconPapers)
JEL-codes: E31 E42 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006
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