The Fiscal Theory of the Price Level in 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) is an important theory that recognizes the interaction between monetary and fiscal policy. In its simplest form, the FTPL assumes that the government commits to a fixed and exogenous present value of primary surpluses implying the adjustment of the price level to equate the real government debt to the present value of primary surpluses. The FTPL relies on the presence of primary surpluses to work. We show that this condition is not necessary in a non-Ricardian economy. The FTPL still hold even when exogenous primary surpluses are null. We consider an overlapping generations of infinitely-lived dynasties model with simple fiscal and monetary policies, where the effective lower bound on nominal interest rates is taken into account. A bubble-like component of government debt appears inducing the determination of the price level by the fiscal policy, when the effective lower bound on nominal interest rates is binding and even when the government primary surpluses equal zero.

Keywords: Wealth Effects; Liquidity Trap; Deflation; Zero Lower Bound; Fiscal Theory of the Price Level; Monetary and Fiscal Rules; Public Debt (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-dge and nep-mon
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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 a Non-Ricardian Economy (2020)
Working Paper: The Fiscal Theory of the Price Level in non-Ricardian Economy (2018)
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