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Is The Fiscal Theory of the Price Level Learnable?

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  • Bennett T. Mccallum

Abstract

This paper presents a prototype model for development of the “fiscal theory of the price level.” In this simple setting, the fiscal theory’s distinctiveness relies upon adoption of a bubble solution, rather than the rational-expectations fundamentals solution. The paper then shows that the fiscal solution is not adaptively learnable, by agents who estimate coefficients relevant for forecasting on the basis of available data, whereas the orthodox “monetarist” solution exists and is learnable. Finally, it is argued that similar results should be expected to apply in more complex models. JEL Nos. E5, E6, D8. Keywords: Monetary theory, fiscal theory, price level determination, learning, rational expectations.

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Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 50 (2003)
Issue (Month): 5 (November)
Pages: 634-649

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Handle: RePEc:bla:scotjp:v:50:y:2003:i:5:p:634-649
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Find related papers by JEL classification:
  • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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  5. Bennett T. McCallum, 2002. "The Unique Minimum State Variable RE Soluiton is E-Stable in All Well Formulated Linear Models," GSIA Working Papers 2003-25, Carnegie Mellon University, Tepper School of Business.
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