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Dissecting fiscal multipliers under the fiscal theory of the price level

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  • 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
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    Cited by:

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    3. John Cochrane, 2022. "A fiscal theory of monetary policy with partially repaid long-term debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 1-21, July.
    4. Sachdeva, Paras & Ahmad, Wasim, 2024. "Fiscal and monetary policy regimes: New evidence from India," Economic Modelling, Elsevier, vol. 139(C).
    5. Junior, Celso J. Costa & Garcia-Cintado, Alejandro C. & Junior, Karlo Marques, 2022. "A modern approach to monetary and fiscal policy," International Review of Economics Education, Elsevier, vol. 39(C).
    6. Akingbade U. Aimola & Nicholas M. Odhiambo & Christian Nsiah, 2021. "Public debt and inflation nexus in Nigeria: An ARDL bounds test approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1921905-192, January.
    7. Margaret M. Jacobson & Eric M. Leeper & Bruce Preston, 2019. "Recovery of 1933," NBER Working Papers 25629, National Bureau of Economic Research, Inc.
    8. Saroj Bhattarai & Jae Won Lee & Choongryul Yang, 2023. "Redistribution and the monetary‐fiscal policy mix," Quantitative Economics, Econometric Society, vol. 14(3), pages 817-853, July.
    9. Aloui, Rym, 2024. "Habit formation and the government spending multiplier," Economic Modelling, Elsevier, vol. 132(C).
    10. Christiaan van der Kwaak, 2024. "Monetary financing does not produce miraculous fiscal multipliers," Discussion Papers 2417, Centre for Macroeconomics (CFM).
    11. Akingbade U. Aimola & Nicholas M. Odhiambo & Christian Nsiah, 2021. "Public debt and inflation nexus in Nigeria: An ARDL bounds test approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1921905-192, January.
    12. Zheng Liu & Jianjun Miao & Dongling Su, 2022. "Fiscal Stimulus Under Average Inflation Targeting," Working Paper Series 2022-22, Federal Reserve Bank of San Francisco.
    13. Yoshibumi Makabe & Yoshihiko Norimasa, 2022. "The Term Structure of Inflation at Risk: A Panel Quantile Regression Approach," Bank of Japan Working Paper Series 22-E-4, Bank of Japan.
    14. Aimola, Akingbade U & Odhiambo, Nicholas M, 2021. "Public debt and inflation: Empirical evidence from Ghana," Working Papers 27063, University of South Africa, Department of Economics.

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    More about this item

    Keywords

    Fiscal multiplier; Fiscal theory of the price level; Monetary financing; Inflation;
    All these keywords.

    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; Modern Monetary Theory
    • 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

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