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

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.
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Submitted on : Thursday, December 10, 2020 - 2:30:08 PM
Last modification on : Wednesday, December 16, 2020 - 4:04:07 AM

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Rym Aloui, Michel Guillard. The Fiscal Theory of the Price Level in a Non-Ricardian Economy. Annals of Economics and Statistics, CNGP-INSEE, 2020, pp.65-82. ⟨10.15609/annaeconstat2009.137.0065⟩. ⟨halshs-03052061⟩

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