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The Fiscal Theory of the Price Level in a World of Low Interest Rates

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  • Bassetto, Marco

    (Federal Reserve Bank of Chicago)

  • Cui, Wei

    () (University College London and Center for Macroeconomics)

Abstract

A central equation for the fiscal theory of the price level (FTPL) is the government budget constraint (or "government valuation equation"), which equates the real value of government debt to the present value of fiscal surpluses. In the past decade, the governments of most developed economies have paid very low interest rates, and there are many other periods in the past in which this has been the case. In this paper, we revisit the implications of the FTPL in a world where the rate of return on government debt may be below the growth rate of the economy, considering different sources for the low returns: dynamic inefficiency, the liquidity premium of government debt, or its favorable risk profile.

Suggested Citation

  • Bassetto, Marco & Cui, Wei, 2017. "The Fiscal Theory of the Price Level in a World of Low Interest Rates," Working Paper Series WP-2017-25, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2017-25
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:dyncon:v:89:y:2018:i:c:p:183-199 is not listed on IDEAS
    2. Dominguez, Begona & Gomis-Porqueras, Pedro, 2016. "The Effects of Secondary Markets for Government Bonds on Inflation Dynamics," MPRA Paper 82448, University Library of Munich, Germany.
    3. repec:eee:dyncon:v:89:y:2018:i:c:p:154-172 is not listed on IDEAS
    4. Rym Aloui & Michel Guillard, 2018. "The Fiscal Theory of the Price Level in non-Ricardian Economy," Working Papers halshs-01896632, HAL.
    5. repec:eee:dyncon:v:89:y:2018:i:c:p:173-182 is not listed on IDEAS
    6. Andolfatto, David & Martin, Fernando M., 2018. "Monetary policy and liquid government debt," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 183-199.
    7. Berentsen, Aleksander & Waller, Christopher, 2018. "Liquidity premiums on government debt and the fiscal theory of the price level," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 173-182.
    8. Rym Aloui & Michel Guillard, 2018. "The Fiscal Theory of the Price Level in non-Ricardian Economy," Working Papers 1824, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

    More about this item

    Keywords

    Debt; fiscal policy; interest rates;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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