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Is The Fiscal Theory of the Price Level Learnable?

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  • Bennett T. Mccallum

Abstract

This paper presents a prototype model for development of the “fiscal theory of the price level.” In this simple setting, the fiscal theory’s distinctiveness relies upon adoption of a bubble solution, rather than the rational-expectations fundamentals solution. The paper then shows that the fiscal solution is not adaptively learnable, by agents who estimate coefficients relevant for forecasting on the basis of available data, whereas the orthodox “monetarist” solution exists and is learnable. Finally, it is argued that similar results should be expected to apply in more complex models. JEL Nos. E5, E6, D8. Keywords: Monetary theory, fiscal theory, price level determination, learning, rational expectations.
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  • Bennett T. Mccallum, 2003. "Is The Fiscal Theory of the Price Level Learnable?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 634-649, November.
    • Handle: RePEc:bla:scotjp:v:50:y:2003:i:5:p:634-649
    DOI: 10.1111/j.0036-9292.2003.05005008.x
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    More about this item

    Keywords

    monetary theory; fiscal theory; price level determination; learning; rational expectations.
    (this abstract was borrowed from another version of this item.)    ;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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