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 polices proposed by (Leeper 1991), for stability under learning of the rational expectations equilibria (REE). Our first result is that the fiscalist REE in the model of (McCallum 2001) is not locally stable under learning. In contrast, in the setting of (Leeper 1991), different possibilities can arise. 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. However, for other parameter domains the monetarist solution is instead the stable equilibrium.
|Date of creation:||03 Aug 2002|
|Date of revision:||07 Jun 2007|
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- 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.
- Charles T. Carlstrom & Timothy S. Fuerst, 2001.
"Timing and real indeterminacy in monetary models,"
9910R, Federal Reserve Bank of Cleveland.
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- 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.
- 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.
- 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.
- McCallum, Bennett T., 2001. "Indeterminacy, bubbles, and the fiscal theory of price level determination," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 19-30, February.
- Bennett T. McCallum, 1998. "Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination," NBER Working Papers 6456, National Bureau of Economic Research, Inc.
- repec:cup:cbooks:9780521589826 is not listed on IDEAS
- Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(02), pages 156-182, June.
- repec:cup:cbooks:9780521589833 is not listed on IDEAS
- repec:cup:macdyn:v:2:y:1998:i:2:p:156-82 is not listed on IDEAS
- repec:cup:cbooks:9780521589819 is not listed on IDEAS
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