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The Fiscal Theory for the Cost Level and Monetarism

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  • Petia Ivanova

Abstract

The purpose of the paper is to highlight the key characteristics of the Fiscal Theory for the Cost Level (FTCL) and to compare them to the postulates of the monetarism. Comparative analysis confirms the thesis that only the versions of this theory in which the trajectory of the cost level diverts from this of the money supply represent it in its pure, authentic way. The remaining scenarios of FTLC stress on the process of monetary adaptation of the fiscal balances – a process which is compatible with the standard monetary theory. To show this compatibility the fiscal policy is examined through the prism of the standard monetary analysis. The versions of FLTC which contradict in a high degree to the monetary analysis are these that draw attention to it. The main conclusion from practical point of view is that the national banks can control the inflation regardless of the fiscal policy and that detailed coordination between the fiscal and monetary policy does not raise their effectiveness.

Suggested Citation

  • Petia Ivanova, 2007. "The Fiscal Theory for the Cost Level and Monetarism," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 60-79.
    • Handle: RePEc:bas:econth:y:2007:i:1:p:60-79
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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