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The Fiscal Myth of the Price Level

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  • Niepelt, Dirk

    ()
    (Institute for International Economic Studies, Stockholm University)

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 a rational expectations equilibrium where all asset holdings reflect optimal household choices. In such a rational expectations equilibrium, policy must be Ricardian even if, in some states of nature, the government defaults or runs an exogenous 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.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 710.

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Length: 19 pages
Date of creation: 16 May 2002
Date of revision:
Publication status: Published in Quartely Journal of Economics, 2004, pages 277-300.
Handle: RePEc:hhs:iiessp:0710

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
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Keywords: Fiscal theory of the price level; debt issuance;

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