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The fiscal theory of the price level in a world of low interest rates

Marco Bassetto and Wei Cui

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A central equation for the fiscal theory of the price level (FTPL) is the government budget constraint (or ”government valuation equation”), which equates the real value of government debt to the present value of fiscal surpluses. In the past decade, the governments of most developed economies have paid very low interest rates, and there are many other periods in the past in which this has been the case. In this paper, we revisit the implications of the FTPL in a world where the rate of return on government debt may be below the growth rate of the economy, considering different sources for the low returns: dynamic inefficiency, the liquidity premium of government debt, or its favorable risk profile.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-10-11
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http://eprints.lse.ac.uk/84951/ Open access version. (application/pdf)

Related works:
Journal Article: The fiscal theory of the price level in a world of low interest rates (2018) Downloads
Working Paper: The Fiscal Theory of the Price Level in a World of Low Interest Rates (2017) Downloads
Working Paper: The Fiscal Theory of the Price Level in a World of Low Interest Rates (2017) Downloads
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