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Reflections on fiscalist divergent price-paths

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Author Info
Óscar J. Arce () (Banco de España)
Abstract

In this paper I analyze the classes of price-paths arising from a non-Ricardian fiscal monetary plan along the lines of the Fiscal Theory of the Price Level (FTPL), under a price invariant nominal money supply rule in a standard Sidrauski-Brock model. I first show that fiscalist speculative deflationary paths are irrational bubbles. Then I argue that a fully autonomous fiscal policy is, in most cases, no implementable, regardless of the time horizon, thus complementing Buiter's (2001, 2002) findings. Finally, I claim that, contrary to the FTPL's arguments, a speculative hyperinflation can never be a necessary result. This latter observation is taken as an evidence against the analogy drawn between the equilibrium value of a firm's stock and money, as recently suggested by some proponents of this new paradigm in monetary economics.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0533e.pdf
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Paper provided by Banco de España in its series Banco de España Working Papers with number 0533.

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Length: 40 pages
Date of creation: Oct 2005
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Handle: RePEc:bde:wpaper:0533

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Related research
Keywords: fiscal-monetary interactions; fiscal theory of the price level; explosive pricepaths; transversality conditions;

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

References listed on IDEAS
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  21. Cushing, Matthew J., 1999. "The indeterminacy of prices under interest rate pegging: The non-Ricardian case," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 131-148, August. [Downloadable!] (restricted)
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