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Using Structural Balance Data to Test the Fiscal Theory of the Price Level: Some International Evidence

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  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

  • Hervé Le Bihan

    (Centre de recherche de la Banque de France)

Abstract

The fiscal theory of the price level has recently received important attention as an alternative theory of price determination. Empirical tests of the FTPL have been rare, and have undergone forceful criticism by Cochrane [Cochrane, J., 1998. A frictionless view of US inflation. NBER Macroeconomics Annual. MIT Press, pp. 323–384] based on “observational equivalence” arguments. This paper proposes two extensions to the empirics of the FTPL. First, we apply the methodology initiated by Canzoneri et al. [Canzoneri, M.B., Cumby, R.E., Diba, B.T., 2001. Is the price level determined by the needs of fiscal solvency? American Economic Review 91, 1221–1238] to European data. Second, we use structural balance data, in order to overcome Cochrane’s critique. Our conclusion is that for neither country the data support a FTPL interpretation.

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  • Jérôme Creel & Hervé Le Bihan, 2006. "Using Structural Balance Data to Test the Fiscal Theory of the Price Level: Some International Evidence," Sciences Po publications info:hdl:2441/3263, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/3263
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    Cited by:

    1. Jérôme Creel & Francesco Saraceno & Paola Veroni, 2005. "Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data," Sciences Po publications info:hdl:2441/2525, Sciences Po.
    2. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.
    3. Jérôme Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2007. "Politique budgétaire discrétionnaire en France. Les effets à court et à long terme," Revue économique, Presses de Sciences-Po, vol. 58(5), pages 1035-1053.
    4. Antipa, P., 2015. "How fiscal policy affects the price level: lessons from a not so distant past," Rue de la Banque, Banque de France, issue 13, November..
    5. Aldama Pierre & Jérôme Creel, 2016. "Why fiscal regimes matter for fiscal sustainability analysis : an application to France," Documents de Travail de l'OFCE 2016-15, Observatoire Francais des Conjonctures Economiques (OFCE).
    6. Hassan Ayoub & Jérôme Creel & Étienne Farvaque, 2008. "Détermination du niveau des prix et finances publiques : le cas du Liban, 1965 – 2005," Revue d’économie du développement, De Boeck Université, vol. 16(3), pages 115-141.
    7. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
    8. Bazzaoui, Lamia & Nagayasu, Jun, 2019. "Is Inflation Fiscally Determined?," MPRA Paper 95753, University Library of Munich, Germany.
    9. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
    10. repec:spo:wpecon:info:hdl:2441/6154 is not listed on IDEAS
    11. repec:spo:wpecon:info:hdl:2441/9644 is not listed on IDEAS
    12. Jérôme Creel & Francesco Saraceno, 2008. "Wealth Effects and Public Debt in an Endogenous Growth Model. Banca d'Italia Public Finance Workshop 'Fiscal Sustainability : Analytical Developments and Emerging Policy Issues', Perugia, 3-5 April 20," Post-Print hal-01053226, HAL.
    13. Paramita Mukherjee & Dipankor Coondoo, 2019. "The Indian Inflation 2006–2016: An Econometric Investigation," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 20(1), pages 46-69, March.
    14. Djelassi, Mouldi & Essid, Lobna, 2012. "Le niveau des prix en Tunisie est-il déterminé par la politique budgétaire?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(2), pages 231-256, Juin.
    15. Łyziak, Tomasz & Mackiewicz-Łyziak, Joanna, 2020. "Does fiscal stance affect inflation expectations? Evidence for European economies," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 296-310.
    16. Nikki Panjer & Leo Haan & Jan P. A. M. Jacobs, 2020. "Is fiscal policy in the euro area Ricardian?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(2), pages 411-429, May.
    17. Mohanty, Ranjan Kumar & Bhanumurthy, N.R., 2020. "Revisiting the Role of Fiscal Policy in Determining Interest Rates in India," Working Papers 20/296, National Institute of Public Finance and Policy.
    18. repec:bfr:rueban:13 is not listed on IDEAS
    19. Jérôme Creel & Günes Kamber, 2004. "Debt, deficits and inflation on the road to the EU: the case of Turkey," Revue de l'OFCE, Presses de Sciences-Po, vol. 91(5), pages 157-174.
    20. Pierre Aldama & Jérôme Creel, 2017. "Why Fiscal Regimes Matter for Fiscal Sustainability: An Application to France," Working Papers 2017.01, International Network for Economic Research - INFER.

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