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A Requiem for the Fiscal Theory of the Price Level

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  • Mr. Roger Farmer
  • Pawel Zabczyk

Abstract

The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.

Suggested Citation

  • Mr. Roger Farmer & Pawel Zabczyk, 2019. "A Requiem for the Fiscal Theory of the Price Level," IMF Working Papers 2019/219, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/219
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    3. Phil Armstrong, 2020. "Can Heterodox Economics Make a Difference?," Books, Edward Elgar Publishing, number 19964.
    4. Anshuman Kamila, 2022. "Fiscal dominance in India: an empirical estimation," Indian Economic Review, Springer, vol. 57(1), pages 113-132, June.
    5. Kamila, Anshuman, 2021. "Fiscal dominance in India: An empirical estimation," Working Papers 21/359, National Institute of Public Finance and Policy.
    6. Anshuman Kamila, 2021. "Fiscal dominance in India: Through the windshield and the rearview mirror," IEG Working Papers 429, Institute of Economic Growth.

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