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The Fallacy of the Fiscal Theory of the Price Level, Again

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  • Willem Buiter

Abstract

The Fiscal Theory of the Price Level (FTPL) rejects the fundamental 'Ricardian' proposition, that the government budget constraint must hold identically, that is for all admissible values of the variables entering the budget constraint. Accordingly, if the government is to meet its contractual debt obligations, one of its instruments must be determined residually to ensure the budget constraint is satisfied. If the government overdetermines its fiscal-financial-monetary policy programme, contractual debt obligations will not be met. The FTPL asserts that even when the government overdetermines its policy programme, contractual debt obligations will always be met. The general price level plays the role of a default premium or discount. The paper shows that the FTPL is a fallacy and leads to anomalies and contradictions.

Suggested Citation

  • Willem Buiter, 2000. "The Fallacy of the Fiscal Theory of the Price Level, Again," CESifo Working Paper Series 303, CESifo.
    • Handle: RePEc:ces:ceswps:_303
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    Cited by:

    1. 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.
    2. repec:hal:wpspec:info:hdl:2441/5122 is not listed on IDEAS
    3. 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.
    4. repec:dau:papers:123456789/3413 is not listed on IDEAS
    5. 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.
    6. repec:hal:spmain:info:hdl:2441/5122 is not listed on IDEAS
    7. Buiter, Willem, 2017. "The Good and the Bad Fiscal Theory of the Price Level," CEPR Discussion Papers 11975, C.E.P.R. Discussion Papers.
    8. repec:spo:wpecon:info:hdl:2441/5122 is not listed on IDEAS
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. Óscar J. Arce, 2005. "Reflections on fiscalist divergent price-paths," Working Papers 0533, Banco de España.
    14. 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).

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