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Government debt and inflation: A cross-country investigation of the fiscal theory of the price level

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  • Weber, Philipp
  • Feld, Lars P.

Abstract

In the early 2020s sharp surge of inflation, unprecedentedly high levels of government debt and deficits fueled attention for the Fiscal Theory of the Price Level (FTPL). This theoretical framework for fiscally induced inflation is well-known and controversially discussed. However, empirical tests are scarce. This paper aims at testing the FTPL empirically by applying a tractable functional form of the intertemporal budget function to a wide range of crises in OECD countries between the years 1980 and 2023. The results imply that between 35 and 40 percent of excess government deficits and spending in times of crises are not financed by orthodox fiscal policy alternatives but instead result in higher prices. This provides empirical evidence for non-Ricardian fiscal policies in times of crises and strengthens the arguments of the FTPL.

Suggested Citation

  • Weber, Philipp & Feld, Lars P., 2025. "Government debt and inflation: A cross-country investigation of the fiscal theory of the price level," Freiburg Discussion Papers on Constitutional Economics 25/2, Walter Eucken Institut e.V..
    • Handle: RePEc:zbw:aluord:315750
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    References listed on IDEAS

    as
    1. Dirk Niepelt, 2004. "The Fiscal Myth of the Price Level," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 277-300.
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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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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