IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Can the Fiscal Theory of the price level explain UK inflation in the 1970s?

  • Fan, Jingwen

    ()

    (Cardiff Business School)

  • Minford, Patrick

    ()

    (Cardiff Business School)

We investigate whether the Fiscal Theory of the Price Level can explain UK inflation in the 1970s. We find that fiscal policy was non-Ricardian and money growth entirely endogenous in this period. The implied model of inflation is tested in two ways: for its trend using cointegration analysis and for its dynamics using the method of indirect inference. We find that it is not rejected. We also find that the model's errors indicate omitted dynamics which merit further research.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://patrickminford.net/wp/E2009_26.pdf
Download Restriction: no

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/26.

as
in new window

Length: 28 pages
Date of creation: Nov 2009
Date of revision: Mar 2011
Handle: RePEc:cdf:wpaper:2009/26
Contact details of provider: Postal: Aberconway Building, Colum Drive, CARDIFF, CF10 3EU
Phone: +44 (0) 29 20874417
Fax: +44 (0) 29 20874419
Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
  2. Patrick Minford & Konstantinos Theodoridis & David Meenagh, 2009. "Testing a Model of the UK by the Method of Indirect Inference," Open Economies Review, Springer, vol. 20(2), pages 265-291, April.
  3. Willi Semmler & Wenlang Zhang, 2004. "Monetary and Fiscal Policy Interactions in the Euro Area," Empirica, Springer, vol. 31(2), pages 205-227, June.
  4. Kim, Soyoung, 2003. "Structural Shocks And The Fiscal Theory Of The Price Level In The Sticky Price Model," Macroeconomic Dynamics, Cambridge University Press, vol. 7(05), pages 759-782, November.
  5. Bennett T. McCallum & Edward Nelson, 2006. "Monetary and fiscal theories of the price level: the irreconcilable differences," Working Papers 2006-010, Federal Reserve Bank of St. Louis.
  6. Javier Andrés & Fernando Ballabriga & Javier Vallés, 2000. "Monetary Policy and Exchange Rate Behavior in the Fiscal Theory of the Price Level," Banco de Espa�a Working Papers 0004, Banco de Espa�a.
  7. Jerome Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2005. "Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data," Documents de Travail de l'OFCE 2005-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  8. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  9. Janssen, Norbert & Nolan, Charles & Thomas, Ryland, 2002. "Money, Debt and Prices in the United Kingdom, 1705-1996," Economica, London School of Economics and Political Science, vol. 69(275), pages 461-79, August.
  10. Bergin, Paul R., 2000. "Fiscal solvency and price level determination in a monetary union," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 37-53, February.
  11. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  12. Thams, Andreas, 2007. "The Relevance of the fiscal Theory of the Price Level revisited," MPRA Paper 1645, University Library of Munich, Germany.
  13. Troy Davig & Eric M. Leeper, 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," NBER Working Papers 15133, National Bureau of Economic Research, Inc.
  14. John H. Cochrane, 1999. "A Frictionless View of U.S. Inflation," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421 National Bureau of Economic Research, Inc.
  15. Stephanie Schmitt-Grohe & Martin Uribe, 1997. "Price level determinacy and monetary policy under a balanced-budget requirement," Finance and Economics Discussion Series 1997-17, Board of Governors of the Federal Reserve System (U.S.).
  16. Sims, Christopher A, 2001. "Fiscal Consequences for Mexico of Adopting the Dollar," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 597-616, May.
  17. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  18. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June.
  19. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 809-842, 06.
  20. Evan Tanner & Alberto Ramos, 2003. "Fiscal sustainability and monetary versus fiscal dominance: evidence from Brazil, 1991-2000," Applied Economics, Taylor & Francis Journals, vol. 35(7), pages 859-873.
  21. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  22. Nelson, Edward & Nikolov, Kalin, 2003. "UK inflation in the 1970s and 1980s: the role of output gap mismeasurement," Journal of Economics and Business, Elsevier, vol. 55(4), pages 353-370.
  23. McCallum, Bennett T., 2001. "Indeterminacy, bubbles, and the fiscal theory of price level determination," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 19-30, February.
  24. David B. Gordon & Eric M. Leeper, 2002. "The Price Level, the Quantity Theory of Money, and the Fiscal Theory of the Price Level," NBER Working Papers 9084, National Bureau of Economic Research, Inc.
  25. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  26. Christopher Allsopp & Amit Kara & Edward Nelson, 2006. "United Kingdom Inflation Targeting and the Exchange Rate," Economic Journal, Royal Economic Society, vol. 116(512), pages F232-F244, 06.
  27. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
  28. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  29. Daniel, Betty C., 2001. "The fiscal theory of the price level in an open economy," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 293-308, October.
  30. Corsetti, Giancarlo & Mackowiak, Bartosz Adam, 2001. "Nominal Debt and the Dynamics of Currency Crises," CEPR Discussion Papers 2929, C.E.P.R. Discussion Papers.
  31. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
  32. Jérôme Creel & Hervé Le Bihan, 2006. "Using Structural Balance Data to Test the Fiscal Theory of the Price Level: Some International Evidence," Sciences Po publications info:hdl:2441/3263, Sciences Po.
  33. Bennett T. Mccallum, 2003. "Is The Fiscal Theory of the Price Level Learnable?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 634-649, November.
  34. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2009. "Can the facts of UK inflation persistence be explained by nominal rigidity?," Economic Modelling, Elsevier, vol. 26(5), pages 978-992, September.
  35. Eric M. Leeper & Tao Zha, 1999. "Modest policy interventions," Working Paper 99-22, Federal Reserve Bank of Atlanta.
  36. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 215-232.
  37. Niepelt, Dirk, 2002. "The Fiscal Myth of the Price Level," Seminar Papers 710, Stockholm University, Institute for International Economic Studies.
  38. Bénassy, Jean-Pascal, 2008. "The Fiscal Theory Of The Price Level Puzzle: A Non-Ricardian View," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 31-44, April.
  39. Troy Davig, 2005. "Periodically expanding discounted debt: a threat to fiscal policy sustainability?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 829-840.
  40. 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.
  41. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  42. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the Fiscal Theory of the Price Level," NBER Working Papers 7668, National Bureau of Economic Research, Inc.
  43. 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.
  44. 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.
  45. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "The fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 22-32.
  46. Troy Davig & Eric M. Leeper, 2009. "Expectations And Fiscal Stimulus," Caepr Working Papers 2009-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  47. Gregory, Allan W & Smith, Gregor W, 1991. "Calibration as Testing: Inference in Simulated Macroeconomic Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 297-303, July.
  48. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
  49. Sabate, Marcela & Gadea, Maria Dolores & Escario, Regina, 2006. "Does fiscal policy influence monetary policy? The case of Spain, 1874-1935," Explorations in Economic History, Elsevier, vol. 43(2), pages 309-331, April.
  50. Allan W. Gregory & Gregor W. Smith, 1987. "Calibration as Estimation," Working Papers 700, Queen's University, Department of Economics.
  51. Davig, Troy, 2004. "Regime-switching debt and taxation," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 837-859, May.
  52. C.A. Sims, 1999. "The Precarious Fiscal Foundations of EMU," DNB Staff Reports (discontinued) 34, Netherlands Central Bank.
  53. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
  54. Ragna Alstadheim, 2005. "Is the price level in Norway determined by fiscal policy?," Working Paper 2005/5, Norges Bank.
  55. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cdf:wpaper:2009/26. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruce Webb)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.