The Failed Theory of the Price Level

Marcus Hagedorn

No 18786, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Fiscal Theory of the Price Level (FTPL) is a promise to obtain price level determinacy even if the nominal interest rate is constant. The idea is that a unique current price level ensures that the present value government budget constraint holds. I establish that this idea hinges on the presence of complete markets and that correspondingly, the FTPL fails to deliver on the price level determinacy promise in (dynamically efficient) overlapping generations (OLG) and incomplete market models, in which Ricardian equivalence fails. I show that the present value government budget does not determine the price level, in contrast to the FTPL logic. I also establish that the price level clears the asset market without imposing the key FTPL assumption that fiscal policy is active. I also explain that Kaplan, Nikolakoudis & Violante (2023) and Brunnermeier, Merkel & Sannikov (2023) do not seem to understand all aspects of determinacy, how the price level is determined in incomplete markets models or the mechanics of the Fiscal Theory of the Price Level.

Keywords: Inflation; Price level determinacy (search for similar items in EconPapers)
JEL-codes: D52 E30 E31 E43 E52 E62 E63 (search for similar items in EconPapers)
Date: 2024-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18786 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:18786

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18786

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().