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Quantitative implications of the fiscal theory of the price level

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  • Santiago Mira Navarro

    () (Universidad de Las Palmas de Gran Canaria)

Abstract

The traditional interpretation of effect of money on prices provided by the Quantity Theory of Money (QTM) has been challenged reciently by the Fiscal Theory of the Price Level (FTP). This paper analyzes the QTM and the FTP from different angle and provides quantitative results of the alternative interpretations. The analysis is based on a general equilibrium rational expectations model driven by monetary, fiscal, and productivity shocks. If the money supply relationship is the determinant of the price level we obtein the standard effects of shocks. However, if the goverment budget constraint is the relation that determines inflation, the impulse response function to the shocks are different. These results are a reference to evaluate the relevance of alternative monetary models: the quantitative implications of a fiscal theory and a a quantitative theory are not the same.

Suggested Citation

  • Santiago Mira Navarro, 2001. "Quantitative implications of the fiscal theory of the price level," Documentos de trabajo conjunto ULL-ULPGC 2001-01, Facultad de Ciencias Económicas de la ULPGC.
  • Handle: RePEc:can:series:2001-01
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    Keywords

    Monetary and Fiscal Policies; Fiscal Theory of Price Level;

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