IDEAS home Printed from https://ideas.repec.org/p/zbw/aluord/315750.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/315750/1/1923520377.pdf
    Download Restriction: no
    ---><---

    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Radwanski, Juliusz, 2020. "On the Purchasing Power of Money in an Exchange Economy," MPRA Paper 104244, University Library of Munich, Germany.
    2. Maitra, Biswajit & Hossain, Tafajul, 2024. "Exploring price level trajectory in India: Does it validate the fiscal theory of price level?," Journal of Asian Economics, Elsevier, vol. 92(C).
    3. Willem Buiter, 2004. "A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: 2 Ghosts, 2 Eccentricities, A Fallacy, A Mirage and A Mythos," NBER Working Papers 10524, National Bureau of Economic Research, Inc.
    4. Bennett T. McCallum & Edward Nelson, 2005. "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(4), pages 565-583, Winter.
    5. Andreas Schabert & Leopold Von Thadden, 2009. "Distortionary Taxation, Debt, and the Price Level," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 159-188, February.
    6. International Monetary Fund, 2008. "Fiscal and Monetary Anchors for Price Stability: Evidence from Sub-Saharan Africa," IMF Working Papers 2008/121, International Monetary Fund.
    7. Mr. Roger Farmer & Pawel Zabczyk, 2019. "A Requiem for the Fiscal Theory of the Price Level," IMF Working Papers 2019/219, International Monetary Fund.
    8. Buiter, Willem, 2007. "Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and," CEPR Discussion Papers 6099, C.E.P.R. Discussion Papers.
    9. Barthélemy, Jean & Mengus, Eric & Plantin, Guillaume, 2024. "The central bank, the treasury, or the market: Which one determines the price level?," Journal of Economic Theory, Elsevier, vol. 220(C).
    10. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
    11. Willem Buiter, 2007. "Is Numérairology the Future of Monetary Economics?," Open Economies Review, Springer, vol. 18(2), pages 127-156, April.
    12. George-Marios Angeletos & Chen Lian, 2023. "Determinacy without the Taylor Principle," Journal of Political Economy, University of Chicago Press, vol. 131(8), pages 2125-2164.
    13. Schabert, Andreas, 2010. "Monetary policy under a fiscal theory of sovereign default," Journal of Economic Theory, Elsevier, vol. 145(2), pages 860-868, March.
    14. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    15. Jerome Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2005. "Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data," Documents de Travail de l'OFCE 2005-12, Observatoire Francais des Conjonctures Economiques (OFCE).
    16. Andreas Schabert & Leopold Von Thadden, 2009. "Distortionary Taxation, Debt, and the Price Level," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 159-188, February.
    17. repec:spo:wpmain:info:hdl:2441/1423 is not listed on IDEAS
    18. Marco Bassetto & Thomas J. Sargent, 2020. "Shotgun Wedding: Fiscal and Monetary Policy," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 659-690, August.
    19. Plantin, Guillaume & Barthélemy, Jean & Mengus, Eric, 2019. "Public Liquidity Demand and Central Bank Independence," CEPR Discussion Papers 14160, C.E.P.R. Discussion Papers.
    20. Ismail O. Fasanya & Ayinke Fajobi & Abiodun Adetokunbo, 2021. "Are Fiscal Deficits Inflationary In Nigeria? New Evidence From Bounds Testing To Cointegration With Structural Breaks," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 66(228), pages 123-148, January –.
    21. Juessen, Falko & Linnemann, Ludger & Schabert, Andreas, 2016. "Default Risk Premia On Government Bonds In A Quantitative Macroeconomic Model," Macroeconomic Dynamics, Cambridge University Press, vol. 20(1), pages 380-403, January.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:aluord:315750. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/euckede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.