A Requiem for the Fiscal Theory of the Price Level
IMF Working Papers, October 11, 2019
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- A Requiem for the Fiscal Theory of the Price Level
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Bibliographic details
- Authors: Roger Farmer, Pawel Zabczyk
- Published: October 11, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513516196.001
Summary
- The Fiscal Theory of the Price Level (FTPL) claims that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy.
- Prior models establishing the FTPL assume all decisions are made by an infinitely-lived representative agent.
- The authors present an alternative model populated by sixty-two generations of people.
- The model is calibrated to an income profile from U.S. data.
- In the authors' model, the FTPL breaks down: the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active.
- The findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
Model and methodology
- Model type: overlapping generations model (sixty-two generations).
- Calibration: based on an income profile from U.S. data.
- Comparison benchmark: contrasts with models assuming an infinitely-lived representative agent where FTPL results have been obtained.
- Key theoretical constructs referenced: accumulation equation, debt accumulation equation, debt valuation equation, valuation equation, steady-state price level, equilibrium debt dynamics, equilibrium equation, excess demand.
Main findings and results
- The Fiscal Theory of the Price Level does not hold in the overlapping generations model presented by the authors.
- The price level is indeterminate in the model.
- The real interest rate is indeterminate in the model.
- Indeterminacy persists even when both monetary policy and fiscal policy are active.
Policy implications and interpretation
- Established criteria for evaluating combinations of fiscal and monetary policies are challenged by the results.
- Policy prescriptions that rely on FTPL logic (i.e., fiscal policy determining the price level) may not be robust when agents are modeled as overlapping generations rather than an infinitely-lived representative agent.
- The analysis suggests caution in adopting fiscal-monetary policy frameworks that presume unique price-level determination by fiscal variables.
Subjects and keywords (as stated in source)
- Subjects: Econometric analysis, Financial services, Fiscal policy, Monetary policy, Negative interest rates, Overlapping generations models, Public debt, Real interest rates
- Keywords: accumulation equation, debt accumulation equation, debt valuation equation, dynamic efficiency, equilibrium debt dynamics, equilibrium equation, excess demand, fiscal policy, fiscal policy regime, fiscal theory of the price level, Global, monetary policy, Negative interest rates, overlapping generations model, Overlapping generations models, price level, price level determination, Real interest rates, steady-state price level, valuation equation, WP
Roger Farmer, and Pawel Zabczyk. "A Requiem for the Fiscal Theory of the Price Level", IMF Working Papers 2019, 219 (2019), accessed 9/16/2026, https://doi.org/10.5089/9781513516196.001
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- Working Paper