Testing the FTPL across government tiers
Control on regional government budgets is important in a monetary union as lower tiers of government have fewer incentives to consolidate debt. According to the Fiscal Theory of the Price Level; unsustainable non-Ricardian fiscal policies eventually force monetary policy to adjust. Hence, uncoordinated and non-regulated regional fiscal policies would therefore threaten price stability for the monetary union as a whole. However, the union central bank is not without defense. A federal government that internalises the spillover effect of non-Ricardian fiscal policies on the price level can offset non-Ricardian regional fiscal policies. A federal government, which taxes and transfers resources between regions, may compensate for unsustainable regional fiscal policies so as to keep fiscal policy Ricardian on aggregate. Following Canzoneri et al. (2001), we test the validity of the Fiscal Theory of the Price Level for both federal and regional governments in Germany. We find evidence of a spillover effect of unsustainable policies on the price level for other Länder. However, the German federal government offsets this effect on the price level by running Ricardian policies. These results have implications for the regulation of fiscal policies in the EMU.
|Date of creation:||Oct 2008|
|Date of revision:||Oct 2008|
|Contact details of provider:|| Postal: Diagonal 690-696, 08034 Barcelona|
Phone: +34 93 402 43 13cazza
Web page: http://www.ub.edu/irea/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Evan Tanner & Alberto Ramos, 2003.
"Fiscal sustainability and monetary versus fiscal dominance: evidence from Brazil, 1991-2000,"
Taylor & Francis Journals, vol. 35(7), pages 859-873.
- Evan C Tanner & Alberto M. Ramos, 2002. "Fiscal Sustainability and Monetary Versus Fiscal Dominance; Evidence From Brazil, 1991-2000," IMF Working Papers 02/5, International Monetary Fund.
- Bergin, Paul R., 2000. "Fiscal solvency and price level determination in a monetary union," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 37-53, February.
- Norbert Janssen & Charles Nolan & Ryland Thomas, 2004. "Money, Debt and Prices in the UK 1705-1996," CDMA Working Paper Series 200407, Centre for Dynamic Macroeconomic Analysis.
- Thams, Andreas, 2007. "The Relevance of the fiscal Theory of the Price Level revisited," MPRA Paper 1645, University Library of Munich, Germany.
- Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
- Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998.
"Is the Price Level Determined by the Needs of Fiscal Solvency?,"
NBER Working Papers
6471, National Bureau of Economic Research, Inc.
- Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December.
- Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," CEPR Discussion Papers 1772, C.E.P.R. Discussion Papers.
- V.V. Chari & Patrick J. Kehoe, 2004.
"On the Desirability of Fiscal Constraints in a Monetary Union,"
NBER Working Papers
10232, National Bureau of Economic Research, Inc.
- V. V. Chari & Patrick J. Kehoe, 2003. "On the desirability of fiscal constraints in a monetary union," Staff Report 330, Federal Reserve Bank of Minneapolis.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ira:wpaper:200812. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alicia García)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.