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The Fiscal Theory of the Price Level with a Bubble

Author

Listed:
  • Markus Brunnermeier

    (Princeton University)

  • Sebastian Merkel

    (Princeton University)

  • Yuliy Sannikov

    (Stanford University)

Abstract

This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy’s growth rate.

Suggested Citation

  • Markus Brunnermeier & Sebastian Merkel & Yuliy Sannikov, 2020. "The Fiscal Theory of the Price Level with a Bubble," Working Papers 2020-47, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-47
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    References listed on IDEAS

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    Cited by:

    1. Jérôme Creel, 2021. "Establishing a Fiscal Dialogue in Europe," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(3), pages 339-355, September.
    2. David Staines, 2023. "Stochastic Equilibrium the Lucas Critique and Keynesian Economics," Papers 2312.16214, arXiv.org.
    3. Makoto Saito, 2021. "Public Bonds as Money Substitutes at Near-Zero Interest Rates: Disequilibrium Analysis of the Current and Future Japanese Economy," Advances in Japanese Business and Economics, in: Strong Money Demand in Financing War and Peace, pages 79-119, Springer.
    4. Ly Dai Hung, 2022. "Safe Assets at Financial Globalization," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-21, October.
    5. Marco Bassetto & Wei Cui, 2020. "A Ramsey Theory of Financial Distortions," Working Papers 775, Federal Reserve Bank of Minneapolis.
    6. Jiang, Zhengyang & Lustig, Hanno & Van Nieuwerburgh, Stijn & Xiaolan, Mindy Z., 2020. "Manufacturing Risk-Free Government Debt," Research Papers 3882, Stanford University, Graduate School of Business.
    7. Pierre L Siklos, 2022. "Monetary, fiscal and demographic interactions in Japan: impact and a comparative assessment," Working Papers halshs-03776217, HAL.
    8. Marco Bassetto & David S. Miller, 2022. "A monetary-fiscal theory of sudden inflations," IFS Working Papers W22/56, Institute for Fiscal Studies.
    9. Ly Dai Hung, 2021. "Economic Convergence With Safe Assets," Working Papers hal-03662832, HAL.
    10. Markus K. Brunnermeier & Sebastian, Sannikov, Yuliy Merkel & Sebastian Merkel, 2021. "Debt as Safe Asset," CESifo Working Paper Series 9500, CESifo.
    11. Masera, Rainer, 2023. "The Challenges Eurozone Stagflation Poses for Households, Businesses and High-Debt Countries: Some Possible Solutions," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 76(4), pages 547-566.
    12. Mengus, Eric & Barthélemy, Jean & Plantin, Guillaume, 2021. "The Central Bank, the Treasury, or the Market: Which One Determines the Price Level?," CEPR Discussion Papers 16679, C.E.P.R. Discussion Papers.
    13. Van Nieuwerburgh, Stijn & Elenev, Vadim & Landvoigt, Tim & Shultz, Patrick, 2021. "Can Monetary Policy Create Fiscal Capacity?," CEPR Discussion Papers 16414, C.E.P.R. Discussion Papers.
    14. Ly Dai Hung, 2022. "Economic Growth and Inflation Tradeoffs within Global Stagflation: Evidence in Vietnam Economy," Working Papers hal-03774248, HAL.
    15. Markus K. Brunnermeier & Sebastian Merkel & Yuliy Sannikov, 2021. "A Safe-Asset Perspective for an Integrated Policy Framework," World Scientific Book Chapters, in: Steven J Davis & Edward S Robinson & Bernard Yeung (ed.), THE ASIAN MONETARY POLICY FORUM Insights for Central Banking, chapter 8, pages 302-332, World Scientific Publishing Co. Pte. Ltd..
    16. van Wijnbergen, Sweder & Olijslagers, Stan & de Vette, Nander, 2020. "Debt sustainability when r - g," CEPR Discussion Papers 15478, C.E.P.R. Discussion Papers.
    17. Sweder van Wijnbergen & Stan Olijslagers & Nander de Vette, 2020. "Debt sustainability when r - g smaller than 0: no free lunch after all," Tinbergen Institute Discussion Papers 20-079/VI, Tinbergen Institute.

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    More about this item

    Keywords

    Fiscal policy; Monetary Economics;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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