The Fiscal Myth of the Price Level
Dirk Niepelt ()
No 710, Seminar Papers from Stockholm University, Institute for International Economic Studies
I examine the "fiscal theory of the price level" according to which "non-Ricardian" policy and predetermined nominal government debt fiscally determine prices. I argue that the non-Ricardian policy assumption and, by implication, fiscal price level determination are inconsistent with a rational expectations equilibrium where all asset holdings reflect optimal household choices. In such a rational expectations equilibrium, policy must be Ricardian even if, in some states of nature, the government defaults or runs an exogenous real primary surplus sequence. I propose an alternative to the fiscal theory of the price level, based on nominal flows instead of nominal stocks. While this alternative framework establishes a consistent link between fiscal policy and the price level, it does not introduce inflationary fiscal effects beyond those suggested by Sargent and Wallace.
Keywords: Fiscal theory of the price level; debt issuance (search for similar items in EconPapers)
JEL-codes: E31 E61 (search for similar items in EconPapers)
Pages: 19 pages
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Published in Quartely Journal of Economics, 2004, pages 277-300.
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Journal Article: The Fiscal Myth of the Price Level (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iiessp:0710
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