The Fiscal Theory of the Price Level - identification and testing for the UK in the 1970s

Jingwen Fan, A. Patrick Minford and Zhirong Ou

No E2013/12, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model,the models have a reduced form that is common in form but, because each model is over-identified, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes.

Keywords: UK Inflation; Fiscal Theory of the Price Level; Identification; Testing; Indirect inference (search for similar items in EconPapers)
JEL-codes: E31 E37 E62 E65 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: The Fiscal Theory of the Price Level - identification and testing for the UK in the 1970s (2013)
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