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Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences

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  • Bennett T. McCallum
  • Edward Nelson

Abstract

The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of rational expectations solutions, whereas others have stressed its capacity to generate equilibria in which price-level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability--and therefore plausibility--of competing rational expectations equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability. Copyright 2005, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 21 (2005)
Issue (Month): 4 (Winter)
Pages: 565-583

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Handle: RePEc:oup:oxford:v:21:y:2005:i:4:p:565-583

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  1. Woodford, Michael, 2003. "Comment on: Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1177-1188, July.
  2. 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.
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Cited by:
  1. 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.
  2. Mihailov, Alexander & Ullrich, Katrin, 2007. "Independence and Accountability of Monetary and Fiscal Policy Committees," ZEW Discussion Papers 07-044, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
  4. Fan, Jingwen & Minford, Patrick, 2010. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," CEPR Discussion Papers 7630, C.E.P.R. Discussion Papers.
  5. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "Provocările politicii monetare
    [Monetary policy challenges]
    ," MPRA Paper 50261, University Library of Munich, Germany, revised 28 Sep 2013.
  6. Schmidt, André, 2011. "Fiskalische Stabilität in einer Währungsunion," Discussion Papers 13/2011, Witten/Herdecke University, Faculty of Management and Economics.

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