A Requiem for the Fiscal Theory of the Price Level

October 11, 2019

Preview Citation

Format: Chicago

Roger Farmer, and Pawel Zabczyk. A Requiem for the Fiscal Theory of the Price Level, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.

Subject: Econometric analysis, Financial services, Fiscal policy, Monetary policy, Negative interest rates, Overlapping generations models, Public debt, Real interest rates

Keywords: Accumulation equation, Debt accumulation equation, Debt valuation equation, Dynamic efficiency, Equilibrium debt dynamics, Equilibrium equation, Excess demand, Fiscal policy, Fiscal policy regime, Fiscal theory of the price level, Global, Monetary policy, Negative interest rates, Overlapping generations model, Overlapping generations models, Price level, Price level determination, Real interest rates, Steady-state price level, Valuation equation, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/219
Stock No:

WPIEA2019219
ISBN:

9781513516196
ISSN:

1018-5941

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