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The Fiscal Theory of the Price Level in non-Ricardian Economy

Author

Listed:
  • Rym Aloui

    (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France)

  • Michel Guillard

    (EPEE and TEPP (FR CNRS 3126), Université d'Evry Val d' Essonne, Boulevard François Mitterrand, 91025, Evry, France.)

Abstract

The Fiscal Theory of the Price Level (FTPL) is an important theory that recognizes the interaction between monetary and fiscal policy. In its simplest form, the FTPL assumes that the government commits to a fixed and exogenous present value of primary surpluses implying the adjustment of the price level to equate the real government debt to the present value of primary surpluses. The FTPL relies on the presence of primary surpluses to work. We show that this condition is not necessary in a non-Ricardian economy. The FTPL still hold even when exogenous primary surpluses are null. We consider an overlapping generations of infinitely-lived dynasties model with simple fiscal and monetary policies, where the effective lower bound on nominal interest rates is taken into account. A bubble-like component of government debt appears inducing the determination of the price level by the fiscal policy, when the effective lower bound on nominal interest rates is binding and even when the government primary surpluses equal zero.

Suggested Citation

  • 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.
  • Handle: RePEc:gat:wpaper:1824
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    Cited by:

    1. Jaka Sriyana & Jiyao Joanna Ge, 2019. "Asymmetric responses of fiscal policy to the inflation rate in Indonesia," Economics Bulletin, AccessEcon, vol. 39(3), pages 1701-1713.

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    More about this item

    Keywords

    Wealth Effects; Liquidity Trap; Deflation; Zero Lower Bound; Fiscal Theory of the Price Level; Monetary and Fiscal Rules; Public Debt;
    All these keywords.

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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