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Reflections on fiscalist divergent price-paths

  • Óscar J. Arce

    ()

    (Banco de España)

In this paper I analyze the classes of price-paths arising from a non-Ricardian fiscal monetary plan along the lines of the Fiscal Theory of the Price Level (FTPL), under a price invariant nominal money supply rule in a standard Sidrauski-Brock model. I first show that fiscalist speculative deflationary paths are irrational bubbles. Then I argue that a fully autonomous fiscal policy is, in most cases, no implementable, regardless of the time horizon, thus complementing Buiter's (2001, 2002) findings. Finally, I claim that, contrary to the FTPL's arguments, a speculative hyperinflation can never be a necessary result. This latter observation is taken as an evidence against the analogy drawn between the equilibrium value of a firm's stock and money, as recently suggested by some proponents of this new paradigm in monetary economics.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0533e.pdf
File Function: First version, October 2005
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0533.

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Length: 40 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:bde:wpaper:0533
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  14. Evans , George W. & Honkapohja, Seppo, 2002. "Policy interaction, learning and the fiscal theory of prices," Research Discussion Papers 18/2002, Bank of Finland.
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