Policy Interaction, Learning and the Fiscal Theory of Prices

George Evans and Seppo Honkapohja

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: We investigate both the rational explosive inflation paths studied by (McCallum 2001), and the classification of fiscal and monetary polices proposed by (Leeper 1991), for stability under learning of the rational expectations equilibria (REE). Our first result is that the fiscalist REE in the model of (McCallum 2001) is not locally stable under learning. In contrast, in the setting of (Leeper 1991), different possibilities can arise. We find, in particular, that there are parameter domains for which the fiscal theory solution, in which fiscal variables affect the price level, can be a stable outcome under learning. However, for other parameter domains the monetarist solution is instead the stable equilibrium.

Keywords: "Inflation; expectations; fiscal and monetary policy; explosive price paths" (search for similar items in EconPapers)
JEL-codes: D84 E31 E52 (search for similar items in EconPapers)
Pages: 28
Date: 2002-08-03, Revised 2007-06-07
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: POLICY INTERACTION, LEARNING, AND THE FISCAL THEORY OF PRICES (2007)
Working Paper: Policy Interaction, Learning and the Fiscal Theory of Prices (2002)
Working Paper: Policy interaction, learning and the fiscal theory of prices (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2002-17

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