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The fallacy of the fiscal theory of the price level, again

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  • Willem H. Buiter

Abstract

This paper argues that the 'fiscal theory of the price level' (FTPL) is fallacious. The source of the fallacy is an elementary economic misspecification. The FTPL denies a fundamental property of any model of a market economy, that the budget constraint of any agent, private or public, must be satisfied identically, ie for all admissible values of the variables entering the budget constraint. Instead the FTPL requires the government's inter-temporal budget constraint to be satisfied only in equilibrium. The FTPL looks for equilibria in which the government can meet its contractual debt obligations exactly, despite having an overdetermined financial-fiscal monetary programme. The economic misspecification has implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. For example, the FTPL implies the anomaly that it can price money in an economy without money. The FTPL has an exact analogue in a 'household budget constraint theory of the price level', which is perhaps more readily recognised as a nonsense.

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  • Willem H. Buiter, 2001. "The fallacy of the fiscal theory of the price level, again," Bank of England working papers 141, Bank of England.
  • Handle: RePEc:boe:boeewp:141
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    Cited by:

    1. Jérôme Creel & Henri Sterdyniak, 2001. "La théorie budgétaire du niveau des prix, un bilan critique," Revue d'économie politique, Dalloz, vol. 111(6), pages 909-939.
    2. repec:dau:papers:123456789/3413 is not listed on IDEAS
    3. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
    4. repec:hal:spmain:info:hdl:2441/5122 is not listed on IDEAS
    5. Buiter, Willem, 2017. "The Good and the Bad Fiscal Theory of the Price Level," CEPR Discussion Papers 11975, C.E.P.R. Discussion Papers.
    6. repec:spo:wpecon:info:hdl:2441/5122 is not listed on IDEAS
    7. Buiter, Willem H. & Sibert, Anne C., 2018. "The fallacy of the fiscal theory of the price level: One last time," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-56.
    8. António Afonso, 2002. "Disturbing the fiscal theory of the price level: Can it fit the eu-15?," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-3, International Conferences on Panel Data.
    9. Ramos Francia Manuel & García-Verdú Santiago & Sánchez-Martínez Manuel, 2018. "Inflation Dynamics under Fiscal Deficit Regime Switching in Mexico," Working Papers 2018-21, Banco de México.
    10. Jerome Creel & Henri Sterdyniak, 2000. "La théorie budgétaire du niveau des prix : un bilan critique (The Fiscal Theory of the Price Level, a critical assessment) (in French with English summary)," Documents de Travail de l'OFCE 2000-03, Observatoire Francais des Conjonctures Economiques (OFCE).
    11. Buiter, Willem, 2017. "The Fallacy of the Fiscal Theory of the Price Level - Once More," CEPR Discussion Papers 11941, C.E.P.R. Discussion Papers.
    12. repec:hal:wpspec:info:hdl:2441/5122 is not listed on IDEAS
    13. Ramiro Sosa Navarro, 2010. "Fiscal Imbalances, Inflation and Sovereign Default Dynamics," Ensayos de Política Económica, Departamento de Investigación Francisco Valsecchi, Facultad de Ciencias Económicas, Pontificia Universidad Católica Argentina., vol. 1(4), pages 108-142, Octubre.
    14. Óscar J. Arce, 2005. "Reflections on fiscalist divergent price-paths," Working Papers 0533, Banco de España.

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