Fiscal Theory of Price Level and An Analysis of the Recent Testing Methodologies of the Theory (in Turkish)

Abstract

In Economic theory, the impact of government debt through wealth effects that enhance the likelihood of real effects in an economy, in which the Ricardian Equivalence fail to hold, is investigated in many studies.Under active fiscal policies as puth foth by Leeper (1991), to equate the intertemporal budget constraint, the increases in price level leads to inflationary periods (Sims, 1991, 1993; Leeper, 1991; Sargent ve Wallace, 1981). As shown by Woodford (1994), in economies, the Quantity Theory of Money, therefore a Money demand function in addition to intertemporal budget constraint equation holds simultaneously, which leads to doubts regarding tests focusing to differentiate Ricardian and Non-Ricardian regimes. In the study, the evaluation methods based on econometric theory and literature are investigated to provide an overlook that follows a path from linear to nonlinear econometric tests. A model will be discussed in accordance with the FTPL theory. Further, the likelihood of increasing failure to evaluate the FTPL theory based on rational expectations with Markov regime switching models will be discussed. STAR type models and their applications to FTPL theory will be discussed.