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The Price Level, The Quantity Theory Of Money, And The Fiscal Theory Of The Price Level

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  • David B. Gordon
  • Eric M. Leeper

Abstract

This paper examines price‐level determination from the perspective of portfolio choice. Arbitrages among money balances, bonds, and investment goods determine their relative demands. Returns to real balance holdings and after‐tax returns to investment goods determine the relative values of nominal and real assets. Because expectations of government policies ultimately determine the expected returns to both nominal and real assets, the price level depends on interactions among current and expected future monetary and fiscal policies. The quantity theory and the fiscal theory emerge as special cases produced by restricting both the margins and the policies considered.

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  • David B. Gordon & Eric M. Leeper, 2006. "The Price Level, The Quantity Theory Of Money, And The Fiscal Theory Of The Price Level," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 4-27, February.
  • Handle: RePEc:bla:scotjp:v:53:y:2006:i:1:p:4-27
    DOI: 10.1111/j.1467-9485.2006.00368.x
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    Cited by:

    1. Taiji Harashima, 2004. "The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level," Macroeconomics 0409018, University Library of Munich, Germany, revised 30 Mar 2005.
    2. Biswajit Maitra & Tafajul Hossain, 2020. "Inflation in India: causes and anti-inflationary policy perception," International Journal of Economic Policy Studies, Springer, vol. 14(2), pages 363-387, August.
    3. Eric M. Leeper, 2003. "Fiscal Policy and Inflation: Pondering the Imponderables," NBER Working Papers 9506, National Bureau of Economic Research, Inc.
    4. Bennett T. McCallum & Edward Nelson, 2005. "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 565-583, Winter.
    5. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
    6. Eric M. Leeper & Todd B. Walker, 2012. "Perceptions and Misperceptions of Fiscal Inflation," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 255-299, National Bureau of Economic Research, Inc.
    7. K. Peren Arin & Peter H. Helles & Murat Koyuncu & Otto F. M. Reich, 2016. "Should We Care About The Composition Of Tax-Based Stimulus Packages?," Contemporary Economic Policy, Western Economic Association International, vol. 34(3), pages 430-445, July.
    8. Eric M. Leeper, 2015. "Fiscal Analysis is Darned Hard," NBER Working Papers 21822, National Bureau of Economic Research, Inc.
    9. Carli, Francesco & Gomis-Porqueras, Pedro, 2021. "Real consequences of open market operations: The role of limited commitment," European Economic Review, Elsevier, vol. 132(C).
    10. Chryssi Giannitsarou & Andrew Scott, 2008. "Inflation Implications of Rising Government Debt," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 393-442, National Bureau of Economic Research, Inc.
    11. Eric Leeper & Tack Yun, 2006. "Monetary-fiscal policy interactions and the price level:Background and beyond," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(4), pages 373-409, August.
    12. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 129-147.
    13. Libich, Jan & Nguyen, Dat Thanh & Stehlík, Petr, 2015. "Monetary exit and fiscal spillovers," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 184-206.
    14. Eric M. Leeper, 2009. "Anchoring fiscal expectations," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 17-42, September.
    15. Ariff, Mohamed & Chung, Tin-fah & M., Shamsher, 2012. "Money supply, interest rate, liquidity and share prices: A test of their linkage," Global Finance Journal, Elsevier, vol. 23(3), pages 202-220.
    16. Faria, Joao Ricardo & Mollick, Andre Varella, 2004. "The nominal theory of interest under habit formation: evidence for the U.S., 1959-2002," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 333-354, December.
    17. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.
    18. António Afonso, 2008. "Ricardian fiscal regimes in the European Union," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(3), pages 313-334, July.
    19. Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2009. "Public Debt, Money Supply, and Inflation: A Cross-Country Study," IMF Staff Papers, Palgrave Macmillan, vol. 56(3), pages 476-515, August.
    20. Joaquim Pina, 2009. "Do international spillovers matter for long run neutrality?," Economics Bulletin, AccessEcon, vol. 29(3), pages 1570-1587.
    21. Chung, Tin-fah & Ariff, M., 2016. "A test of the linkage among money supply, liquidity and share prices in Asia," Japan and the World Economy, Elsevier, vol. 39(C), pages 48-61.
    22. Dat Thanh Nguyen & Viet Anh Hoang, 2020. "Monetary Consequences of Fiscal Stress in a Game Theoretic Framework," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 125-164.
    23. Petia Ivanova, 2007. "The Fiscal Theory for the Cost Level and Monetarism," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 60-79.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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