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The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence

  • Luca Sala

This paper aims to test some implications of the fiscal theory of the price level (FTPL). We develop a model similar to Leeper (1991) and Woodford (1996), but extended so to generate real effects of fiscal policy also in the "Ricardian" regime, via an OLG demographic structure. We test on the data the predictions of the FTPL as incorporated in the model. We find that the US fiscal policy in the period 1960-1979 can be classified as "Non-Ricardian", while it is "Ricardian" since 1990. According to our analysis, the fiscal theory of the price level characterizes one phase of the post-war US history.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 257.

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Date of creation: 2004
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Handle: RePEc:igi:igierp:257
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  18. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
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  24. Eric M. Leeper, 1989. "Policy rules, information and fiscal effects in a "Ricardian" model," International Finance Discussion Papers 360, Board of Governors of the Federal Reserve System (U.S.).
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