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Reflections on fiscalist divergent price-paths

Oscar Arce ()

No 533, Working Papers from Banco de España, Working Papers Homepage

Abstract: In this paper I analyze the classes of price-paths arising from a non-Ricardian fiscal monetary plan along the lines of the Fiscal Theory of the Price Level (FTPL), under a price invariant nominal money supply rule in a standard Sidrauski-Brock model. I first show that fiscalist speculative deflationary paths are irrational bubbles. Then I argue that a fully autonomous fiscal policy is, in most cases, no implementable, regardless of the time horizon, thus complementing Buiter's (2001, 2002) findings. Finally, I claim that, contrary to the FTPL's arguments, a speculative hyperinflation can never be a necessary result. This latter observation is taken as an evidence against the analogy drawn between the equilibrium value of a firm's stock and money, as recently suggested by some proponents of this new paradigm in monetary economics.

Keywords: fiscal-monetary interactions; fiscal theory of the price level; explosive pricepaths; transversality conditions (search for similar items in EconPapers)
JEL-codes: E31 E42 E61 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2005-10
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