Fiscal Theory Of The Price Level Research Articles

Empirical Analysis of Fiscal Theory of The Price Level in Turkey

Para ve maliye politikalarının makro ekonomik istikrarın sağlanmasında önemli araçlar olduğu bilinmektedir. Ancak fiyat düzeyi üzerinde hangi politikanın etkin olduğu yıllardır araştırmalara konu olan sorunsallardan biridir. Fiyat Düzeyinin Mali Teorisi (FTPL) fiyat istikrarının sağlanmasında para politikası kadar maliye politikalarının da etkili olduğunu savunmaktadır. Bu çalışma, Türkiye’de FTPL’nin geçerliliğini 2006-2019 dönemi için ARDL eşbütünleşme testi ile analiz etmektedir. Ampirik bulgular, faiz dışı denge ile kamu borç stoku, enflasyon, kamu harcamaları ve vergi gelirleri arasında uzun dönemli bir eş bütünleşme ilişkisinin varlığını ortaya koymaktadır. Ülkemizde maliye politikaları fiyat düzeyinin belirlenmesinde etkin bir rol oynamaktadır.

Does fiscal stance affect inflation expectations? Evidence for European economies

According to the fiscal theory of the price level, in a non-Ricardian regime, high public debt should lead to a price-level increase so as to fulfill intertemporal government budget constraint. Forward-looking agents should anticipate this rise by pushing up their inflation expectations. This study tests the above hypothesis by analyzing the impact of fiscal sustainability on the formation of inflation expectations by private-sector agents – consumers and professional forecasters – in European countries. In the study, we estimate models of inflation expectations, and we include public debt among the explanatory variables. The novelty of this study lies in our analysis of whether the relationship between public debt and inflation expectations is affected by the degree to which fiscal policy is sustainable in European economies. We find that fiscal stance influences the inflation expectations of consumers and professional forecasters. Contrary to intuition, the reaction of consensus economic forecasts to public debt in countries with sustainable fiscal policies seems stronger than in economies with less disciplined fiscal policies. This may suggest that fiscal authorities are constrained by the way in which private-sector agents form their expectations, conducting more responsible fiscal policy in countries where the reaction of economic agents to fiscal variables is stronger.

Revisiting speculative hyperinflations in monetary models

This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Although apparently a narrow issue, studying these extreme economies turns out to be quite illuminating in understanding the fundamentals of price level determination. It is also relevant in evaluating the broader claims that advocates of the fiscal theory of the price level have made. In Obstfeld and Rogoff (1983, 1986) we show that in pure fiat money models with rational expectations, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency – a fiscal mechanism, but one that comes into play only as a backstop. Indeed that backing does not have to be certain. Cochrane (2011, 2019), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. We show here why, in fact, his analysis involves a subtle change in model specification that adds a distinct monetary fragility to our model. Our baseline analysis uses a canonical money-in-the-utility-function setup due to Brock (1974, 1975), but following Wallace (1981), we show the same results go through in an overlapping-generations model of money.

The Power of Forward Guidance and the Fiscal Theory of the Price Level

Standard New Keynesian models predict implausibly large and favorable responses of inflation and output to expansionary forward guidance on interest rates. We find that the introduction of permanent or recurring active fiscal policy dampens the response of output and inflation to forward guidance in the New Keynesian model. Moreover, the presence of regime-switching policy introduces expectation e ects that cause forward guidance to be less stimulative in our regime-switching model's active money, passive fiscal policy regime. Finally, the introduction of long-term debt a ects the magnitude of the stimulus resulting from forward guidance in models with active fiscal policy.

A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt

I construct a simple model with sticky prices and interest rate targets, closed by fiscal theory of the price level with long-term debt and fiscal and monetary policy rules. Fiscal surpluses rise following periods of deficit, to repay accumulated debt, but surpluses do not respond to arbitrary unexpected inflation and deflation, so fiscal policy remains active. This specification avoids many puzzles and counterfactual predictions of standard active-fiscal specifications. The model produces reasonable responses to fiscal and monetary policy shocks, including smooth and protracted disinflation following monetary or fiscal tightening. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Fiscal Theory of the Price Level with a Bubble

This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy's growth rate.

The Fiscal Theory of the Price Level in a Non-Ricardian Economy

The Fiscal Theory of the Price Level (FTPL) establishes that the general level of prices is determined at equilibrium in order to satisfy the intertemporal government budget constraint. Importantly, in a representative agent framework, this theory requires that the present value of future primary surpluses has to be strictly positive. In a richer framework where the economy is non-Ricardian—an overlapping generations of infinitely-lived agents model—and where the monetary policy is constrained by the Zero Lower Bound (ZLB) on nominal interest rates, we show that the FTPL case arises endogenously, even when exogenous primary surpluses are null. In such a framework, a bubble-like component of government debt induces the price level determinacy by the fiscal policy and affects its equilibrium level.

Aging and deflation from a fiscal perspective

Negative correlations between inflation and aging are observed across developed nations. To understand such correlations from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model, with short-lived governments choosing tax rates and bond issues. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Over the past 40 years, aging has generated non-negligible deflationary pressure in Japan. Our analysis sheds new light on the controversy over the burden of national debt and the commitment effect of strategic debt creation.

A Requiem for the Fiscal Theory of the Price Level

The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.

New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level

Abstract Whereas in former times, the ‘Chicago View’ in monetary policy stood for the Quantity Theory and money supply control, it is now the centre of unconventional approaches in macro theory. The Neo-Fisherian proposal suggests, in the case of low inflation and nominal interest rates pegged to the zero-lower bound, to increase policy rates immediately to the long-run equilibrium value that corresponds to the ‘natural’ real interest rate and the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt even if central banks abstain from monetising. Both views are criticized for analytical and empirical reasons. Zusammenfassung Während in früheren Zeiten die ‘Chicago-Sicht’ in der Geldpolitik für die Quantitätstheorie und das Konzept der Geldmengensteuerung stand, werden heute damit unkonventionelle Positionen in der makroökonomischen Theorie assoziiert. Der neue Fisher-Ansatz empfiehlt, im Fall niedriger Inflation und einer Beschränkung durch die Null-Zins-Grenze die Zentralbankzinsen direkt auf das Niveau anzuheben, dass durch den ‘natürlichen’ Realzins und die Zielinflationsrate bestimmt ist. Die Fiskalische Theorie der Preise behauptet, dass das Güterpreisniveau auf einen Wert springt, der die langfristige reale Tragfähigkeit der Staatsschulden sichert, selbst wenn die Notenbank keine Monetisierung betreibt. Beide Positionen können empirisch nicht überzeugen und werden einer analytischen Kritik unterzogen. JEL Classification: E52, E58

A Requiem for the Fiscal Theory of the Price Level

A Requiem for the Fiscal Theory of the Price Level

Ramsey Optimal Policy in the New-Keynesian Model with Public Debt

In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-rule parameter implies the local stability of public-debt dynamics (passive fiscal policy).

Fiscal Reaction Functions Across the World: In Quest of Statistical (In)significance

We estimate fiscal reaction functions for a panel of 173 countries using data between 1970-2014. Most notably, we assess the existence of non-Ricardian regimes, as postulated in the Fiscal Theory of the Price Level (FTPL), or, contrarily, the possibility of Ricardian regimes. By means of several, well established and state-of-the-art, panel data techniques, we find that: governments have on average increased the primary balance as a response to higher previous government indebtedness, implying a Ricardian fiscal regime, contradicting the FTPL. In addition, the Ricardian results are confirmed for the advanced countries and for the euro area group, but are less clear for the other country groups, lacking statistical significance. A more Ricardian fiscal regime emerged essentially after 1995 and notably in the sub-period 2008-2014, after the Global Financial Crisis (before that statistical insignificance is the norm) From a P-VAR analysis, we find that increases in government indebtedness increase primary balances, supporting overall the existence of an average Ricardian fiscal regime.

MONETARY VERSUS FISCAL DOMINANCE IN EMERGING EUROPEAN ECONOMIES

The conventional macroeconomic paradigm is that monetary policy provides the nominal anchor for inflation expectations and that fiscal policy is disciplined in implementing credible and timely revenue-expenditure measures when debt rises, in order to ensure sustainability. In this scenario monetary policy is active, whereas fiscal policy is passive, which is referred to as monetary dominance. However, the proponents of the Fiscal Theory of the Price Level emphasize that another regime may be possible - the one of fiscal dominance. In this setup, primary balance follows some arbitrary path, not necessary compatible with the evolution of government debt, and monetary policy is faced with limited room for manoeuvre as it has no option but to adjust to fiscal developments. Following these theoretical foundations, the aim of this paper is to empirically ascertain the prevailing policy regime (monetary versus fiscal dominance) in five emerging European economies (Hungary, Romania, Bulgaria, Serbia and Macedonia). In line with expectations, results overwhelmingly suggest that monetary policy may have been subordinated to fiscal policy over the period of analysis in all economies under scrutiny and that fiscally-led regime prevailed.

Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel

This paper examines the role of precautionary liquidity (reserves) and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. Through the deposits channel either of these two determinants can explain a number of effects including, (i) zero-bound optimal policy rates, (ii) a negative deposit rate spread, but also (iii) determinacy at the lower-zero bound. Similarly, through its effects on the deposits channel the interest on reserves can act as the main tool of monetary policy, that is shown to provide higher welfare gains than a simple Taylor rule. This result is shown to hold at the zero-bound and it is independent of precautionary liquidity, or the fiscal theory of the price level.

The fallacy of the fiscal theory of the price level – one last time

Abstract There have been attempts to resurrect the fiscal theory of the price revel (FTPL). The original FTPL rests on a fundamental compounded fallacy: confusing the intertemporal budget constraint (IBC) of the State, holding with equality and with sovereign bonds priced at their contractual values, with a misspecified equilibrium nominal bond pricing equation, and the ‘double use’ of this IBC. This generates a number of internal inconsistencies and anomalies. The FTPL is not about endogenous money issuance guaranteeing solvency of the State when public spending and taxes are exogenous. The problem is not about empirical content or the realism of the assumptions, but about flawed internal logic. The issue is not just of academic interest. If fiscal authorities were to take the FTPL seriously, costly policy accidents, including sovereign default and hyperinflation, could result. Interpreting the FTPL as an equilibrium selection mechanism in models with multiple equilibria does not help. Attempts by Sims to extend the FTPL to models with nominal price rigidities fail. The attempted resurrection of the FTPL fails.

The Bank of England and Parliament were monetarily adroit during the Napoleonic Wars

With the connivance of Parliament, was the Bank of England's over issue of banknotes inflationary? The inflation stemmed from military subsidy and Peninsula campaign payments, as well as food imports, far in excess of Britain's export earnings to cover these capital transfers (particularly when crimped by the Continental Blockade), and not merely from domestic credit over issue. Neither domestic money creation nor the fiscal theory of the price level best explains the imbalance in Britain's international accounts during the Napoleonic Wars. This deficit stemmed from domestic production shortfalls in essentials (above all food production) and contractual obligations such as military spending/subsidies relative to the pound's international purchasing power which emanated from the ability of Britain to sell exports and replace imports with domestic output (raise food production internally). These types of highly inelastic transactions tended to operate independently of domestic money creation, fiscal policy (taxes) or price developments (inflation). This article tracks England's bullion debate, which concerned whether gold prices rose (and hence sterling's exchange rate fell) because military capital transfers overwhelmed the balance of payments, or because the Bank of England over issued paper money after the gold cover was removed in 1797. The issues herein are not antiquated because the primary issues in monetary debates for two centuries have concerned the cause of inflation and deflation, and whether the domestic money supply or the balance of payments is responsible. Determining actual causation is critical for the proper solution: monetary deflation, or domestic and international restructuring of trade and investment.

Deficient EMU’s Tasks: As to Asymmetric Transmission Effects of An United Eurosystem’s Monetary Policy

Abstract （399words） This paper aims to clarify and partially solve what tasks ongoing EMU has actually confronted since its establishment, mainly focusing on clarifying asymmetric transmission effects of an united Eurosystem’s monetary policy and on finding conditions of establishing value convergence among EMU and/or EU. Research design of this paper bases on both theoretical innovations （Control Engineering to achieve convergence） and empirically verifiable methods （Panel Fixed VARSARAR model: Panel Fixed Effects Vector AutoRegressive and Spatial AutoRegressive with Additional AutoRegressive Error Model）, which enables us to discuss EMU’s convergence tasks quantitatively. Accordingly, this paper consists of two parts. One is a verification part of EMU’s interrelated transmission effects of monetary policy, which clarifies how we can explain its asymmetric effects among EMU utilizing direct transmission and spatial indirect effects. Asymmetric effects of an united monetary policy have stemmed from idiosyncrasy of economic structures, spatial spillovers of its economic policy and human-made institutional spatial customs governing EMU and Euro among within and occasionally without EMU member states. This paper verifies whether inclusive theory of monetary policy explains variations of real and interrelated EMU’s convergent criterion indicators by which monetary channels have affected HICP and fiscal resilience by such as Quantitative Easing and Fiscal Theory of the Price Level （FTPL） channels. The other is a part of establishment conditions of multibody-made convergence system through control by human utilizing methods of Control Engineering or state-space model, which enables us to lead EMU from divergence toward convergence of European values. This paper also discusses how to procced EMU’s policy convergence by human-made innovations through diagonalization of both direct and indirect matrix through introduction of single-peakedness or stratification of national priority issues among EMU members or Euro, which means that EMU’s or EU’s convergence of values needs some form of stratification without fail. The results of this paper are as follows: VARSARAR model implies that indirect spatial lags which seem to represent crisis-driven fragility and distance-based neglectedness as core-periphery structures within the EU, and among-countries-linked financial contagion in Europe that are possibly but not completely verified as background reasons of distance-based European spatial lags, have actually large effects on inflation and fiscal position during crisis, and have also less effects on them after mitigation of the European crisis. Also, Control Engineering implies that One Europe necessarily requires stratification of member states’ sovereignty or euro in order to proceed and establish convergence of European view of values, say EMU and Euro.

Modelling the Determinants of Price Level in the Nigerian Economy

This paper evaluated the deterministic ability of some macroeconomic variables on the Nigeria’s price level (PL) using the Vector Error Correction Model (VECM). Review of relevant literature was thoroughly carried out. The specification of the price deterministic model was consistent with the traditional backward-looking Philips curve, quantity theory of money and the Fiscal theory of the price level. The Johansen cointegration test results provided evidence of a long run relationship among the chosen variables. The VECM results showed that the 2nd lag of PL negatively and significantly affects current PL. The second lag of Real Gross Domestic Product (RGDP) had a positive and significant effect on the current PL. Current exchange rate made a negative and significant impact on the PL whereas exchange rate at lag two made positive and significant impact. Domestic credit positively and significantly affected PL in the first period and positively but insignificantly affected it in the second period. Trade openness had significant and positive impact on PL. Money supply, government expenditure and nominal interest rate had no significant impact on PL. The outcome of all the diagnostic tests supported the acceptability of the model’s results. Based on our empirical findings, we recommend that the Nigerian monetary authority should keep tab on the variables implicated by the model of this study as significant determinants of PL.

Liquidity premiums on government debt and the fiscal theory of the price level

We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending. The price dynamics are driven solely by the liquidity premium on the debt.