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The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence

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  • Luca Sala

Abstract

This paper aims to test some implications of the fiscal theory of the price level (FTPL). We develop a model similar to Leeper (1991) and Woodford (1996), but extended so to generate real effects of fiscal policy also in the "Ricardian" regime, via an OLG demographic structure. We test on the data the predictions of the FTPL as incorporated in the model. We find that the US fiscal policy in the period 1960-1979 can be classified as "Non-Ricardian", while it is "Ricardian" since 1990. According to our analysis, the fiscal theory of the price level characterizes one phase of the post-war US history.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 257.

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Date of creation: 2004
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Handle: RePEc:igi:igierp:257

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  2. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  4. Carlo A. Favero & Tommaso Monacelli, 2003. "Monetary-Fiscal Mix and Inflation Performance: Evidence from the U.S," Working Papers 234, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. Blanchard Olivier & Weil Philippe, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(2), pages 1-23, November.
  6. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," Working Paper 2007-24, Federal Reserve Bank of Atlanta.
  7. Eric M. Leeper, 1989. "Policy rules, information and fiscal effects in a "Ricardian" model," International Finance Discussion Papers 360, Board of Governors of the Federal Reserve System (U.S.).
  8. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  9. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  10. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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  12. John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," CRSP working papers 479, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. Fabio Ghironi, 2000. "Towards new open economy macroeconometrics," Staff Reports 100, Federal Reserve Bank of New York.
  14. Atsushi Inoue & Lutz Kilian, 2002. "Bootstrapping Smooth Functions of Slope Parameters and Innovation Variances in VAR (∞) Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 309-332, May.
  15. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Series 0128, European Central Bank.
  16. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  17. Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
  18. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  19. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  20. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
  21. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  22. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
  23. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  24. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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Citations

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Cited by:
  1. Peter Claeys, 2006. "Policy mix and debt sustainability: evidence from fiscal policy rules," Empirica, Springer, vol. 33(2), pages 89-112, June.
  2. Obinyeluaku, Moses & Viegi, Nicola, 2009. "How does fiscal policy affect monetary policy in the Southern African Community (SADC)?," MPRA Paper 15372, University Library of Munich, Germany.
  3. Óscar J. Arce, 2005. "Reflections on fiscalist divergent price-paths," Banco de Espa�a Working Papers 0533, Banco de Espa�a.
  4. António Afonso, 2008. "Ricardian fiscal regimes in the European Union," Empirica, Springer, vol. 35(3), pages 313-334, July.
  5. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad & López-Salido, J David, 2008. "Monetary and Fiscal Policy Coordination when Bonds Provide Transactions Services," CEPR Discussion Papers 6814, C.E.P.R. Discussion Papers.
  6. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
  7. International Monetary Fund, 2008. "Fiscal and Monetary Anchors for Price Stability," IMF Working Papers 08/121, International Monetary Fund.
  8. Jean-Pascal Bénassy, 2005. "The fiscal theory of the price level puzzle: A non Ricardian view," PSE Working Papers halshs-00590560, HAL.

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