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The fiscal theory of the price level and sluggish inflation: how important shall the wealth effect be?

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Author Info
Jerome Creel () (Observatoire Français des Conjonctures Économiques)
Henri Sterdyniak () (Observatoire Français des Conjonctures Économiques)

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Abstract

According to the fiscal theory of the price level (FTPL), the interactions between monetary and fiscal policies with governments facing the possibility to act in a non-Ricardian manner make the general price level be fully determined. Here, depending on the expectations framework, we show to what extent the validity of the FTPL also depends on consumers being non-Ricardian. With prices driven by rational expectations, the qualitative results of the strategic interactions between policies do not depend on the Ricardian or non-Ricardian behaviour by the households. With sluggish inflation, the strong version of the FTPL does not bring to a dynamically stable economy. The economy is stable only for a weak version of the FTPL; but, this time, stability conditions depend strongly on the existence and size of the wealth effect. If inflation is sluggish, the FTPL is incompatible with Ricardian consumers.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2002-01.

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Date of creation: 2002
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Handle: RePEc:fce:doctra:0201

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Related research
Keywords: fiscal theory of the price level; inflation rate; monetary policy; fiscal policy; public debt.;

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Find related papers by JEL classification:
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Renate Ohr & André Schmidt, 2006. "Handelbare Verschuldungsrechte zur Sicherung fiskalischer Stabilität in der Währungsunion?," Departmental Discussion Papers 128, University of Goettingen, Department of Economics. [Downloadable!]
  2. Jerome Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2007. "Has the Golden Rule of Public Finance Made a Difference in the UK ?," Documents de Travail de l'OFCE 2007-13, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  3. Jerome Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2005. "Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data," Documents de Travail de l'OFCE 2005-12, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  4. Bruno Ducoudré, 2005. "Fiscal policy and interest rates," Documents de Travail de l'OFCE 2005-08, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  5. Kilian Bizer & Zulia Gubaydullina & Hazim Rahahleh & Werner Sesselmeier, 2007. "FTPL-Perspective on Tradable Deficit Permits in the EMU," Atlantic Economic Journal, International Atlantic Economic Society, vol. 35(3), pages 259-267, September. [Downloadable!] (restricted)
  6. Christophe Schalck, 2007. "Effects of Fiscal Policies in Four European Countries: A Non-linear Structural VAR Approach," Economics Bulletin, Economics Bulletin, vol. 5(22), pages 1-7. [Downloadable!]
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