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Using structural balance data to test the fiscal theory of the price level: Some international evidence

  • Creel, Jerome
  • Bihan, Herve Le

The fiscal theory of the price level has recently received important attention as an alternative theory of price determination. Empirical tests of the FTPL have been rare, and have undergone forceful criticism by Cochrane [Cochrane, J., 1998. A frictionless view of US inflation. NBER Macroeconomics Annual. MIT Press, pp. 323–384] based on “observational equivalence” arguments. This paper proposes two extensions to the empirics of the FTPL. First, we apply the methodology initiated by Canzoneri et al. [Canzoneri, M.B., Cumby, R.E., Diba, B.T., 2001. Is the price level determined by the needs of fiscal solvency? American Economic Review 91, 1221–1238] to European data. Second, we use structural balance data, in order to overcome Cochrane’s critique. Our conclusion is that for neither country the data support a FTPL interpretation.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 28 (2006)
Issue (Month): 2 (June)
Pages: 338-360

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Handle: RePEc:eee:jmacro:v:28:y:2006:i:2:p:338-360
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," NBER Working Papers 6771, National Bureau of Economic Research, Inc.
  2. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  3. 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, vol. 4(3), pages 381-99.
  4. Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January.
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  8. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
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  10. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
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  13. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  14. 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.
  15. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
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  17. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
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