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Fiscal Theory of the Price Level in Small and Open Economies

Author

Listed:
  • Juan Pablo Di Iorio

    (Universidad de San Andrés)

  • Javier García-Cicco

    (Universidad de San Andrés)

Abstract

A salient feature of many emerging and developing economies is that a substantial fraction of government debt is denominated in foreign currency. We study the implications of the Fiscal Theory of the Price Level (FTPL) in a standard New Keynesian small and open economy model, with an explicit role for the currency denomination of public debt. We show that, while the classical FTPL characterization of equilibrium existence and uniqueness extends largely independently of debt composition, the propagation of shocks does not. The currency denomination of public liabilities alters the effects of monetary and fiscal policy, including the possibility that a monetary tightening leads to a depreciation under active fiscal regimes. More broadly, the interaction between the fiscal-monetary policy mix and the share of foreign-currency debt also plays a central role in shaping the response to external shocks.

Suggested Citation

  • Juan Pablo Di Iorio & Javier García-Cicco, 2026. "Fiscal Theory of the Price Level in Small and Open Economies," Working Papers 179, Universidad de San Andres, Departamento de Economia, revised Feb 2026.
    • Handle: RePEc:sad:wpaper:179
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    File URL: https://repec.udesa.edu.ar/pub/econ/doc179.pdf
    File Function: First version, February 2026
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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