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The fiscal theory of the price level and the backing theory of money

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  • Sproul, Michael

Abstract

A numerical example of privately issued money is used to illustrate the fiscal theory of the price level, and to show that the fiscal theory is best understood as a subset of the backing theory of money. Government issuance of money or debt is shown to be potentially inflationary only when the government’s net worth is negative, and when the government’s assets do not rise in step with its liabilities. The backing theory is used to examine whether inflation can be avoided by a sufficiently tough central bank, and to criticize the view that fiscal policies affect inflation through their wealth effects.

Suggested Citation

  • Sproul, Michael, 2011. "The fiscal theory of the price level and the backing theory of money," MPRA Paper 32502, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:32502
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    File URL: https://mpra.ub.uni-muenchen.de/32502/1/MPRA_paper_32502.pdf
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    References listed on IDEAS

    as
    1. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
    2. Michael F. Sproul, 2003. "There's No Such Thing As Fiat Money," UCLA Economics Working Papers 830, UCLA Department of Economics.
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    More about this item

    Keywords

    Money; price level; fiscal; real bills; backing theory;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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