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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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  • Jérôme Creel

    (OFCE)

  • Henri Sterdyniak

    (OFCE)

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 Sciences Po in its series Sciences Po publications with number 2002-01.

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Date of creation: Jan 2002
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Handle: RePEc:spo:wpmain:info:hdl:2441/2972

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Citations

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Cited by:
  1. Christophe Schalck, 2007. "Effects of Fiscal Policies in Four European Countries: A Non-linear Structural VAR Approach," Economics Bulletin, AccessEcon, vol. 5(22), pages 1-7.
  2. Bruno Ducoudré, 2005. "Fiscal policy and interest rates," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2005-08, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Schmidt, André, 2011. "Fiskalische Stabilität in einer Währungsunion," Discussion Papers, Witten/Herdecke University, Faculty of Management and Economics 13/2011, Witten/Herdecke University, Faculty of Management and Economics.
  4. 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, Observatoire Francais des Conjonctures Economiques (OFCE) 2005-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Creel, Jérôme, 2001. "Strategic Interactions between Monetary and fiscal Policies : a case study for the European Stability Pact," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/3413, Paris Dauphine University.
  6. repec:ebl:ecbull:v:5:y:2007:i:22:p:1-7 is not listed on IDEAS
  7. Jérôme Creel & Francesco Saraceno & Paola Veroni, 2007. "Has the Golden Rule of Public Finance Made a difference in the UK," Sciences Po publications 2007-13, Sciences Po.
  8. Renate Ohr & André Schmidt, 2006. "Handelbare Verschuldungsrechte zur Sicherung fiskalischer Stabilität in der Währungsunion?," Departmental Discussion Papers, University of Goettingen, Department of Economics 128, University of Goettingen, Department of Economics.
  9. 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, International Atlantic Economic Society, vol. 35(3), pages 259-267, September.
  10. Jérôme Creel & Francesco Saraceno & Paola Veroni, 2006. "Estimating the impact of public investment in the united Kingdom : Has the Golden Rule of Public Finance Made a Difference ?," Sciences Po publications info:hdl:2441/2681, Sciences Po.

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