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Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination

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  • Bennett T. McCallum

Abstract

The recently-developed fiscal theory of price level determination contends that there is an important class of policy rules in which there exists a unique rational expectations solution that shows the price level to be dependent upon fiscal policy and independent of monetary variables. The present paper argues, however, that there is an alternative solution to these models that has entirely traditional (or monetarist') properties. This latter solution is perhaps the more plausible since it is the solution that is typically regarded as the bubble-free fundamentals' solution. The argument involves a respecification of feasible instrument variables.

Suggested Citation

  • Bennett T. McCallum, 1998. "Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination," NBER Working Papers 6456, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6456
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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