Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences

Bennett McCallum and Edward Nelson

No 12089, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.

JEL-codes: D8 E5 E6 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (13)

Published as Bennett T. McCallum & Edward Nelson, 2005. "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 565-583, Winter.

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Working Paper: Monetary and fiscal theories of the price level: the irreconcilable differences (2006)
Journal Article: Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences (2005)
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