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The Price Level, The Quantity Theory Of Money, And The Fiscal Theory Of The Price Level

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  • David B. Gordon
  • Eric M. Leeper

Abstract

We consider price level determination from the perspective of portfolio choice. Arbitrages among money balances, bonds, and investment goods determine their relative demands. Returns to real balance holdings (transactions services), the nominal interest rate, and after-tax returns to investment goods determine the relative values of nominal and real assets. Since expectations of government policies ultimately determine the expected returns to both nominal and real assets, monetary and fiscal policies jointly determine the price level. Special cases of the fiscal and monetary policies considered produce the quantity theory of money and the fiscal theory of the price level.

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Bibliographic Info

Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 53 (2006)
Issue (Month): 1 (02)
Pages: 4-27

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Handle: RePEc:bla:scotjp:v:53:y:2006:i:1:p:4-27

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Citations

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Cited by:
  1. Bennett T. McCallum & Edward Nelson, 2006. "Monetary and fiscal theories of the price level: the irreconcilable differences," Working Papers, Federal Reserve Bank of St. Louis 2006-010, Federal Reserve Bank of St. Louis.
  2. António Afonso, 2008. "Ricardian fiscal regimes in the European Union," Empirica, Springer, Springer, vol. 35(3), pages 313-334, July.
  3. Eric Leeper & Tack Yun, 2006. "Monetary-fiscal policy interactions and the price level:Background and beyond," International Tax and Public Finance, Springer, Springer, vol. 13(4), pages 373-409, August.
  4. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, Elsevier, vol. 14(2), pages 129-147.
  5. Eric M. Leeper, 2009. "Anchoring Fiscal Expectations," NBER Working Papers 15269, National Bureau of Economic Research, Inc.
  6. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
  7. Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2009. "Public Debt, Money Supply, and Inflation: A Cross-Country Study," IMF Staff Papers, Palgrave Macmillan, vol. 56(3), pages 476-515, August.
  8. Eric M. Leeper & Todd B. Walker, 2012. "Perceptions and Misperceptions of Fiscal Inflation," NBER Working Papers 17903, National Bureau of Economic Research, Inc.
  9. Faria, Joao Ricardo & Mollick, Andre Varella, 2004. "The nominal theory of interest under habit formation: evidence for the U.S., 1959-2002," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 15(3), pages 333-354, December.
  10. Eric M. Leeper, 2003. "Fiscal Policy and Inflation: Pondering the Imponderables," NBER Working Papers 9506, National Bureau of Economic Research, Inc.
  11. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.
  12. Ariff, Mohamed & Chung, Tin-fah & M., Shamsher, 2012. "Money supply, interest rate, liquidity and share prices: A test of their linkage," Global Finance Journal, Elsevier, vol. 23(3), pages 202-220.
  13. Taiji Harashima, 2004. "The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level," Macroeconomics, EconWPA 0409018, EconWPA, revised 23 Sep 2004.
  14. Joaquim Pina, 2009. "Do international spillovers matter for long run neutrality?," Economics Bulletin, AccessEcon, vol. 29(3), pages 1570-1587.
  15. Petia Ivanova, 2007. "The Fiscal Theory for the Cost Level and Monetarism," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 60-79.

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