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The Fiscal Theory of the Price Level and Initial Government Debt

  • Betty Daniel

    (SUNY Albany)

It is widely believed that the Fiscal Theory of the Price Level (FTPL) does not work in an environment in which initial government debt is zero. This paper demonstrates that this view is incorrect when the government issues a set of financial assets restricted to standard nominal debt contracts and money. In particular, it is possible to define a stochastic non-Ricardian fiscal policy for which the set of equilibrium price sequences under non-Ricardian fiscal policy is a proper subset of the set of equilibrium price sequences under Ricardian fiscal policy. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.02.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 2 (April)
Pages: 193-206

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Handle: RePEc:red:issued:06-142
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  1. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  2. Dirk Niepelt, 2004. "The Fiscal Myth of the Price Level," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 276-299, February.
  3. Marco Bassetto, 2002. "A Game-Theoretic View of the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 70(6), pages 2167-2195, November.
  4. 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.
  5. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
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