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Is the Fiscal Theory of the Price Level Learnable?

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  • Bennett T. McCallum

Abstract

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.

Suggested Citation

  • Bennett T. McCallum, 2003. "Is the Fiscal Theory of the Price Level Learnable?," NBER Working Papers 9961, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9961
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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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