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The fiscal theory of the price level and sluggish inflation: how important shall the wealth effect be? Author info | Abstract | Publisher info | Download info | Related research | Statistics Jerome Creel () (Observatoire Français des Conjonctures Économiques )
Henri Sterdyniak () (Observatoire Français des Conjonctures Économiques )
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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: 2002Date of revision:
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Keywords: fiscal theory of the price level ; inflation rate ; monetary policy ; fiscal policy ; public debt. ; Other versions of this item:
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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