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

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  • Rym Aloui
  • Michel Guillard

Abstract

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.

Suggested Citation

  • Rym Aloui & Michel Guillard, 2020. "The Fiscal Theory of the Price Level in a Non-Ricardian Economy," Annals of Economics and Statistics, GENES, issue 137, pages 65-82.
    • Handle: RePEc:adr:anecst:y:2020:i:137:p:65-82
    DOI: 10.15609/annaeconstat2009.137.0065
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    Cited by:

    1. Jaka Sriyana & Jiyao Joanna Ge, 2019. "Asymmetric responses of fiscal policy to the inflation rate in Indonesia," Economics Bulletin, AccessEcon, vol. 39(3), pages 1701-1713.

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    More about this item

    Keywords

    Wealth Effects; Liquidity Trap; Deflation; Zero Lower Bound; Fiscal Theory of the Price Level; Monetary and Fiscal Rules; Public Debt.;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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