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Is the Fiscal Theory of the Price Level Learnable?

  • Bennett T. McCallum

This paper presents a prototype model for development of the fiscal theory of the price level.' In this simple setting, the fiscal theory's distinctiveness relies upon adoption of a bubble solution, rather than the rational-expectations fundamentals solution. The paper then shows that the fiscal solution is not adaptively learnable, by agents who estimate coefficients relevant for forecasting on the basis of available data, whereas the orthodox monetarist' solution exists and is learnable. Finally, it is argued that similar results should be expected to apply in models that are more general in various dimensions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9961.

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Date of creation: Sep 2003
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Publication status: published as Scottish Journal of Political Economy, Vol. 50, no. 5 (November 2003): 634-649
Handle: RePEc:nbr:nberwo:9961
Note: EFG ME
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  1. Woodford, Michael, 2003. "Comment on: Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1177-1188, July.
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  8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  9. 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.
  10. W.H. Buiter, 2000. "The Fallacy of the Fiscal Theory of the Price Level," CEP Discussion Papers dp0447, Centre for Economic Performance, LSE.
  11. McCallum, Bennett T, 1984. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 123-35, February.
  12. Bennett T. McCallum, 2002. "The Unique Minimum State Variable RE Soluiton is E-Stable in All Well Formulated Linear Models," GSIA Working Papers 2003-25, Carnegie Mellon University, Tepper School of Business.
  13. Evans, George W., 1986. "Selection criteria for models with non-uniqueness," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 147-157, September.
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  15. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
  16. Bennett T. McCallum, 2002. "Consistent Expectations, Rational Expectations, Multiple-Solution Indeterminacies, and Least-Squares Learnability," NBER Working Papers 9218, National Bureau of Economic Research, Inc.
  17. Stephanie Schmitt-Grohe & Martin Uribe, 1998. "Price Level Determinacy and Monetary Policy under a Balanced-Budget Requirement," Departmental Working Papers 199833, Rutgers University, Department of Economics.
  18. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  19. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
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  27. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  28. Philippe Weil, 2002. "Reflections on the Fiscal Theory of the Price Level," Sciences Po publications info:hdl:2441/8643, Sciences Po.
  29. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June.
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  31. Evans, George, 1985. "Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1217-33, November.
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  35. repec:spo:wpecon:info:hdl:2441/8643 is not listed on IDEAS
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