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The Fiscal Myth of the Price Level

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  • Dirk Niepelt

Abstract

I examine the "fiscal theory of the price level" according to which "non-Ricardian" policy and predetermined nominal government debt fiscally determine prices. I argue that the non-Ricardian policy assumption and, by implication, fiscal price level determination are inconsistent with an equilibrium in which all asset holdings reflect optimal household choices. In such an equilibrium, policy must be Ricardian even if, in some states of nature, the government defaults or commits to an arbitrary real primary surplus sequence. I propose an alternative to the fiscal theory of the price level, based on nominal flows instead of nominal stocks. While this alternative framework establishes a consistent link between fiscal policy and the price level, it does not introduce inflationary fiscal effects beyond those suggested by Sargent and Wallace. © 2004 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 119 (2004)
Issue (Month): 1 (February)
Pages: 276-299

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Handle: RePEc:tpr:qjecon:v:119:y:2004:i:1:p:276-299

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