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The fiscal theory of the price level and the backing theory of money

  • Sproul, Michael

A numerical example of privately issued money is used to illustrate the fiscal theory of the price level, and to show that the fiscal theory is best understood as a subset of the backing theory of money. Government issuance of money or debt is shown to be potentially inflationary only when the government’s net worth is negative, and when the government’s assets do not rise in step with its liabilities. The backing theory is used to examine whether inflation can be avoided by a sufficiently tough central bank, and to criticize the view that fiscal policies affect inflation through their wealth effects.

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File URL: http://mpra.ub.uni-muenchen.de/32502/1/MPRA_paper_32502.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32502.

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Date of creation: Jul 2011
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Handle: RePEc:pra:mprapa:32502
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  1. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
  2. Michael F. Sproul, 2003. "There's No Such Thing As Fiat Money," UCLA Economics Working Papers 830, UCLA Department of Economics.
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