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The Fiscal Theory of the Price Level and Initial Government Debt

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  • Betty Daniel

    (SUNY Albany)

Abstract

It is widely believed that the Fiscal Theory of the Price Level (FTPL) does not work in an environment in which initial government debt is zero. This paper demonstrates that this view is incorrect when the government issues a set of financial assets restricted to standard nominal debt contracts and money. In particular, it is possible to define a stochastic non-Ricardian fiscal policy for which the set of equilibrium price sequences under non-Ricardian fiscal policy is a proper subset of the set of equilibrium price sequences under Ricardian fiscal policy. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.02.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 2 (April)
Pages: 193-206

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Handle: RePEc:red:issued:06-142

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Related research

Keywords: Fiscal theory of the price level; Active and passive fiscal policy; Ricardian and non-Ricardian fiscal policy; Monetary policy;

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References

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  1. Niepelt, Dirk, 2002. "The Fiscal Myth of the Price Level," Seminar Papers 710, Stockholm University, Institute for International Economic Studies.
  2. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the Fiscal Theory of the Price Level," NBER Working Papers 7668, National Bureau of Economic Research, Inc.
  3. 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.
  4. Marco Bassetto, 2000. "A Game-Theoretic View of the Fiscal Theory of the Price Level," Econometric Society World Congress 2000 Contributed Papers 1492, Econometric Society.
  5. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
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Cited by:
  1. Betty Daniel & Christos Shiamptanis, 2008. "Fiscal Policy in the European Monetary Union," Discussion Papers 08-11, University at Albany, SUNY, Department of Economics.
  2. Betty Daniel, 2008. "Exchange Rate Crises and Fiscal Solvency," Discussion Papers 08-09, University at Albany, SUNY, Department of Economics.

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