The Fiscal Theory of the Price Level in a Non-Ricardian Economy

Rym Aloui () and Michel Guillard ()
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Rym Aloui: GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique

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Abstract: The Fiscal Theory of the Price Level (FTPL) establishes that the general level of prices is determined at equilibrium in order to satisfy the intertemporal government budget constraint. Importantly, in a representative agent framework, this theory requires that the present value of future primary surpluses has to be strictly positive. In a richer framework where the economy is non-Ricardian—an overlapping generations of infinitely-lived agents model—and where the monetary policy is constrained by the Zero Lower Bound (ZLB) on nominal interest rates, we show that the FTPL case arises endogenously, even when exogenous primary surpluses are null. In such a framework, a bubble-like component of government debt induces the price level determinacy by the fiscal policy and affects its equilibrium level.

Keywords: Public Debt; Monetary and Fiscal Rules; Fiscal Theory of the Price Level; Zero Lower Bound; Deflation; Liquidity Trap; Wealth Effects (search for similar items in EconPapers)
Date: 2020-03
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Published in Annals of Economics and Statistics, 2020, 137, pp.65-82. ⟨10.15609/annaeconstat2009.137.0065⟩

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Related works:
Journal Article: The Fiscal Theory of the Price Level in a Non-Ricardian Economy (2020)
Working Paper: The Fiscal Theory of the Price Level in non-Ricardian Economy (2018)
Working Paper: The Fiscal Theory of the Price Level in non-Ricardian Economy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03052061

DOI: 10.15609/annaeconstat2009.137.0065

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