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THE FISCAL THEORY OF THE PRICE LEVEL PUZZLE: A NON-RICARDIAN VIEW

Published online by Cambridge University Press:  01 April 2008

JEAN-PASCAL BÉNASSY
JEAN-PASCAL BÉNASSY*
Affiliation:
CEPREMAP, CNRS, and PSE
*
Address correspondence to: Jean-Pascal Bénassy, CEPREMAP-ENS, 48 Boulevard Jourdan, Bâtiment E, 75014, Paris, France; e-mail: [email protected].
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Abstract

The fiscal theory of the price level says that the price level can be made determinate if the government uses fiscal policies such that government liabilities explode unless the price in the first period is at the “right” level. The policy implications are disturbing, as they call for rather adventurous fiscal policies. We show that these disturbing policy implications are specific to the “Ricardian” models that have been used to develop the theory. By moving to non-Ricardian models, we see that price determinacy is consistent with reasonable fiscal policies.

Keywords

Fiscal Theory of the Price LevelNon-Ricardian ModelsPrice Determinacy
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 31 - 44
Copyright
Copyright © Cambridge University Press 2008

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