The fiscal theory of the price level: The case of Morocco

Abstract

In this paper, we will use the econometric model and the price-level fiscal theory (PLFT), which looks at how the government surplus, debt, and inflation interact to apply a vector autoregression (VAR) model to the Moroccan economy. We first want to figure out how fiscal and monetary policy shocks affect the economy. The second thing we want to do is study how fiscal and monetary policy affects each other. So, the theoretical limits we used to determine our model are based on an FTPL framework. The general price level budget and Keynesian theories are not entirely wrong because of what we found. Also, the fact that most of the variation in inflation can be explained by changes in the money supply suggests that monetary policy works well in the Moroccan economy to control inflation. However, debt policy has little effect on this control. The government is worried about the level of public debt in Morocco because it positively affects the economy. Also, the positive effects over time should give the government confidence that the debt policy is working. So, debt dynamics still need to be a reason to worry because they would help the economy overall. Because it has a negligible effect on the economy immediately and lowers inflation, the government should pay less attention to the amount of debt and how quickly it grows.