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The fiscal theory of the price level puzzle: A non-Ricardian view

Author

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  • Jean-Pascal Bénassy

    (PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres)

Abstract

The fiscal theory of the price level says that the price level can be made determinate if the government uses fiscal policies such that government liabilities explode unless the price in the first period is at the "right" level. The policy implications are disturbing, as they call for rather adventurous fiscal policies. We show that these disturbing policy implications are specific to the "Ricardian" models that have been used to develop the theory. By moving to non-Ricardian models, we see that price determinacy is consistent with reasonable fiscal policies.

Suggested Citation

  • Jean-Pascal Bénassy, 2008. "The fiscal theory of the price level puzzle: A non-Ricardian view," Post-Print halshs-00754316, HAL.
    • Handle: RePEc:hal:journl:halshs-00754316
    DOI: 10.1017/S1365100507070071
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    References listed on IDEAS

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    Cited by:

    1. Plantin, Guillaume & Barthélemy, Jean & Mengus, Eric, 2019. "Public Liquidity Demand and Central Bank Independence," CEPR Discussion Papers 14160, C.E.P.R. Discussion Papers.
    2. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
    3. Jean‐Pascal Bénassy, 2009. "Interest rate rules and global determinacy: An alternative to the Taylor principle," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(4), pages 359-374, December.

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