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A Comment on "Paper Money" by Chris Sims

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  • Hagedorn, Marcus

Abstract

Sims (2013) intended to illustrate the Fiscal Theory of the Price Level (FTPL). This comment shows that in his endeavor, Sims (2013) overlooked the fact that the FTPL does not extend to overlapping generations (OLG) or to incomplete markets models. Otherwise he would have recognized that his simplifying assumptions are indeed knife-edge. Furthermore Brunnermeier et al. (2023) would not have based their misunderstanding of the workings of the FTPL in OLG and incomplete markets models on Sims (2013). Likewise Bassetto and Sargent’s (2020) claim, that it is sufficient for fiscal policy to implicitly provide a nominal anchor through setting the real primary surplus, does not extend to OLG or incomplete markets models. To ensure determinacy, fiscal policy has to explicitly set a nominal anchor as envisaged by the seminal work of Hagedorn (2016).

Suggested Citation

  • Hagedorn, Marcus, 2024. "A Comment on "Paper Money" by Chris Sims," CEPR Discussion Papers 19768, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19768
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