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Is the Price Level Determined by the Needs of Fiscal Solvency?

  • Matthew B. Canzoneri
  • Robert E. Cumby
  • Behzad T. Diba

The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level "jumps" to assure fiscal solvency. In this non-Ricardian regime, fiscal policy--not monetary policy--provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 5 (December)
Pages: 1221-1238

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:5:p:1221-1238
Note: DOI: 10.1257/aer.91.5.1221
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