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Explaining the fiscal theory of the price level

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  • Narayana R. Kocherlakota
  • Christopher Phelan

Abstract

Many traditional macroeconomic models do not have determinate predictions for the path of inflation: even for a given specification of money supplies, many paths of inflation are consistent with equilibrium. According to the fiscal theory of the price level, fiscal policy can be used to select which of these many paths actually occur. This article explains the fiscal theory of the price level and discusses its empirical and policy implications. The article argues that the theory is equivalent to giving the government an ability to choose among equilibria.

Suggested Citation

  • Narayana R. Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Fall), pages 14-23.
    • Handle: RePEc:fip:fedmqr:y:1999:i:fall:p:14-23:n:v.23no.4
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    References listed on IDEAS

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