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A Game-Theoretic View of the Fiscal Theory of the Price Level

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  • Marco Bassetto

    ()
    (University of Minnesota and Federal Reserve Bank of Minneapolis)

Abstract

The goal of this paper is to probe the validity of the fiscal theory of the price level by modelling explicitly the market structure in which households and the government make their decisions. I describe the economy as a game, and I am thus able to state precisely the consequences of actions that are out of the equilibrium path. I show that there exist government strategies that lead to a version of the fiscal theory, in which the price level is determined by fiscal variables alone. These strategies are however more complex than the simple budgetary rules usually associated with the fiscal theory, and the government budget constraint cannot be merely viewed as an equilibrium condition. Copyright The Econometric Society 2002.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 70 (2002)
Issue (Month): 6 (November)
Pages: 2167-2195

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Handle: RePEc:ecm:emetrp:v:70:y:2002:i:6:p:2167-2195

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References

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  1. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  2. Bassetto, Marco, 2005. "Equilibrium and government commitment," Journal of Economic Theory, Elsevier, vol. 124(1), pages 79-105, September.
  3. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  4. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
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  6. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
  7. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  8. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  9. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  10. David K. Levine & Wolfgang Pesendorfer, 1995. "When Are Agents Negligible?," Levine's Working Paper Archive 96, David K. Levine.
  11. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
  12. Pesendorfer, Wolfgang & Levine, David & Fudenberg, Drew, 1998. "When Are Nonanonymous Players Negligible?," Scholarly Articles 3203775, Harvard University Department of Economics.
  13. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  14. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
  15. W.H. Buiter, 2000. "The Fallacy of the Fiscal Theory of the Price Level," CEP Discussion Papers dp0447, Centre for Economic Performance, LSE.
  16. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
  17. Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-18, July.
  18. Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October.
  19. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September.
  20. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
  21. Woodford, Michael, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Seminar Papers 632, Stockholm University, Institute for International Economic Studies.
  22. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June.
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