IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v95y2017icp62-83.html
   My bibliography  Save this article

Dissecting fiscal multipliers under the fiscal theory of the price level

Author

Listed:
  • Beck-Friis, Peder
  • Willems, Tim

Abstract

We derive analytical expressions for fiscal multipliers on output and inflation under the Fiscal Theory of the Price Level. In the associated ‘fiscal regime’, taxation multipliers turn positive, while the government spending multiplier has the same functional form as its counterpart in the ‘monetary regime’, augmented by a nominal wealth effect. As a result, fiscal multipliers tend to be larger in the fiscal regime, with the degree of price stickiness being a key determinant of their exact sizes. In particular, multipliers go to infinity as prices become fully fixed, and collapse to their equivalents in the monetary regime as prices become fully flexible. Standard calibrations suggest that the fiscal regime hosts a government spending multiplier on output that lies between 1 and 3. We also analyze the effectiveness of money-financed fiscal stimulus. In the fiscal regime, money-financed stimulus is equivalent to a particular form of debt-financed stimulus. The effectiveness of money-financed stimulus in raising output (relative to inflation) decreases as monetary policy becomes more responsive to inflation.

Suggested Citation

  • Beck-Friis, Peder & Willems, Tim, 2017. "Dissecting fiscal multipliers under the fiscal theory of the price level," European Economic Review, Elsevier, vol. 95(C), pages 62-83.
    • Handle: RePEc:eee:eecrev:v:95:y:2017:i:c:p:62-83
    DOI: 10.1016/j.euroecorev.2017.03.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292117300533
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John H. Cochrane, 1999. "A Frictionless View of U.S. Inflation," NBER Chapters,in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421 National Bureau of Economic Research, Inc.
    2. International Monetary Fund, 2008. "Fiscal and Monetary Anchors for Price Stability; Evidence from Sub-Saharan Africa," IMF Working Papers 08/121, International Monetary Fund.
    3. Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
    4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    5. Aiyagari, S. Rao & Christiano, Lawrence J. & Eichenbaum, Martin, 1992. "The output, employment, and interest rate effects of government consumption," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 73-86, October.
    6. Claudio Borio & Piti Disyatat, 2010. "Unconventional Monetary Policies: An Appraisal," Manchester School, University of Manchester, vol. 78(s1), pages 53-89, September.
    7. repec:eee:macchp:v2-2305 is not listed on IDEAS
    8. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    9. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
    10. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    11. Kim, Soyoung, 2003. "Structural Shocks And The Fiscal Theory Of The Price Level In The Sticky Price Model," Macroeconomic Dynamics, Cambridge University Press, vol. 7(05), pages 759-782, November.
    12. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    13. Buiter, Willem H., 2014. "The simple analytics of helicopter money: Why it works - always," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-51.
    14. Raju Huidrom & M. Ayhan Kose & Jamus J. Lim & Franziska L. Ohnsorge, 2016. "Do fiscal multipliers depend on fiscal positions?," CAMA Working Papers 2016-35, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    15. Bhattarai, Saroj & Lee, Jae Won & Park, Woong Yong, 2014. "Inflation dynamics: The role of public debt and policy regimes," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 93-108.
    16. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
    17. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
    18. Pontus Rendahl, 2016. "Fiscal Policy in an Unemployment Crisis," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 1189-1224.
    19. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    20. Robert J. Barro & Robert G. King, 1984. "Time-Separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 817-839.
    21. Cochrane, John H., 2014. "Monetary policy with interest on reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 74-108.
    22. Campbell Leith & Eric Leeper, 2016. "Understanding Inflation as a Joint Monetary-Fiscal Phenomenon," Working Papers 2016_01, Business School - Economics, University of Glasgow.
    23. Francesco Bianchi, 2012. "Evolving Monetary/Fiscal Policy Mix in the United States," American Economic Review, American Economic Association, vol. 102(3), pages 167-172, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fiscal multiplier; Fiscal theory of the price level; Monetary financing; Inflation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:95:y:2017:i:c:p:62-83. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eer .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.