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The Fiscal Myth of the Price Level
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2002 (English)Report (Other academic)
Abstract [en]

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.

Place, publisher, year, edition, pages
Stockholm: IIES , 2002. , 21 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University. (Online), ISSN 1653-610X ; 710
Keyword [en]
fiscal theory of the price level, debt insurance
National Category
URN: urn:nbn:se:su:diva-42025OAI: diva2:343727
Available from: 2010-08-16 Created: 2010-08-16 Last updated: 2010-08-16Bibliographically approved

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