The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. The maturity structure of the debt matters in this theory. For example, it determines whether news of future deficits implies current inflation or future inflation, and the long-term debt allows the government to offset surplus shocks by ex-post devaluation. In the optimal policy, the government uses fiscal operations to smooth cyclical fiscal shocks. Since policy movements react to events rather than cause them, the optimal policy produces time series that are similar to U.S. time series.
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Article provided by Econometric Society in its journal Econometrica.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
John H. Cochrane, 1999.
"A Frictionless View of U.S. Inflation,"
NBER Chapters,
in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421
National Bureau of Economic Research, Inc.
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