The fiscal theory of the price level: a narrow theory for non-fiat money
AbstractI examine the postulates of the Fiscal Theory of the Price Level (FTPL) under a nominal interest rate peg. First, I show that the usual definition of a non-Ricardian plan involves a number of government's non-credible policy commitments, thus confuting the interpretation of the FTPL as a policy-based equilibrium selection device. The main novelty of this criticism is that it is based on the same core assumptions maintained by this theory: there is a positive stock of governmentissued assets at the beginning of the history owned by the households, flow of funds constraints must be respected in every contingency, although transversality conditions may be violated at off-equilibrium prices. Then I investigate some additional necessary conditions that allow the government to implement non-Ricardian fiscal plans that result in a unique equilibrium under an interest rate peg. A critical necessary condition for the credibility of such a fiscalist plan is that the equilibrium level of seigniorage must be non-positive. I argue that the fiscalist stock-analogy, under this monetary rule, is only meaningful, precisely, when money enters into the government constraint as a destination of funds, rather than as a source.
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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0501.
Length: 45 pages
Date of creation: Jan 2005
Date of revision:
fiscal-monetary interactions; fiscal theory of the price level; interest rate pegging; government commitment;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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