Examining the Fiscal Theory of the Price Level: Evidence from developed and developing countries

This paper implements a panel VECM to investigate whether fiscal policy plays a significant role in price determination using an annual panel dataset covering advanced and emerging economies from 2010 to 2024. The empirical results indicate that, during normal periods, most fiscal authorities worldwide restore intertemporal budget constraints through fiscal balance adjustments rather than price adjustments, consistent with a Ricardian regime. However, following the onset of the pandemic, fiscal policy in most countries appears to shift toward a non-Ricardian regime, in which the price level adjusts to satisfy the intertemporal budget constraint, providing empirical support for the Fiscal Theory of the Price Level (FTPL). Greater budget transparency is found to moderate inflationary pressures arising from fiscal imbalances during crisis periods, although no significant effect is observed during normal times. Moreover, higher budget transparency helps slow the accumulation of public debt across countries under both normal and crisis conditions.