Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences
FRB of St. Louis Working Paper No. 2006-010A
36 Pages Posted: 13 Mar 2006
There are 3 versions of this paper
Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences
Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences
Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences
Date Written: February 2006
Abstract
The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
Keywords: Fiscal theory of the price level, quantity theory, monetarism, monetary-fiscal policy coordination
JEL Classification: E31, E52, E63
Suggested Citation: Suggested Citation
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