Policy interaction, learning and the fiscal theory of prices
We investigate both the rational explosive inflation paths studied by McCallum (2001) and the classification of fiscal and monetary policies proposed by Leeper (1991) for stability under learning of rational expectations equilibria (REE). Our first result is that the fiscalist REE in the model of McCallum (2001) is not locally stable under learning. By contrast, in the setting of Leeper (1991), different possibilities can obtain. We find, in particular, that there are parameter domains for which the fiscal theory solution – in which fiscal variables affect the price level – can be a stable outcome under learning. For other parameter domains, the monetarist solution is the stable equilibrium.
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- Bennett T. McCallum, .
"Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination,"
GSIA Working Papers
1998-19, Carnegie Mellon University, Tepper School of Business.
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- Carlstrom, Charles T. & Fuerst, Timothy S., 2001.
"Timing and real indeterminacy in monetary models,"
Journal of Monetary Economics,
Elsevier, vol. 47(2), pages 285-298, April.
- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
- Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(02), pages 156-182, June.
- Buiter, Willem H., 1998.
"The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs and Fiscal Theories of the Price Level,"
CEPR Discussion Papers
1799, C.E.P.R. Discussion Papers.
- Willem H. Buiter, 1998. "The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs, and Fiscal Theories of the Price Level," NBER Working Papers 6396, National Bureau of Economic Research, Inc.
- Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
- C.A. Sims, 1999. "The Precarious Fiscal Foundations of EMU," DNB Staff Reports (discontinued) 34, Netherlands Central Bank.
- Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542 Elsevier.
- repec:cup:macdyn:v:2:y:1998:i:2:p:156-82 is not listed on IDEAS
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