Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-29T19:50:14.065Z Has data issue: false hasContentIssue false
  • English
  • Français

POLICY INTERACTION, LEARNING, AND THE FISCAL THEORY OF PRICES

Published online by Cambridge University Press:  05 July 2007

GEORGE W. EVANS  and
SEPPO HONKAPOHJA
GEORGE W. EVANS
Affiliation:
University of Oregon
SEPPO HONKAPOHJA
Affiliation:
University of Cambridge
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate both the rational explosive inflation paths studied by McCallum (2001), and the classification of fiscal and monetary policies proposed by Leeper (1991), for stability under least squares (LS) learning of the rational expectations equilibria (REE). Our first result is that the explosive fiscalist REE is not locally stable under LS learning. In contrast, in Leeper's setting, there are policy regimes for which the fiscalist solution, in which fiscal variables affect the price level, can be a locally stable outcome under LS learning. However, for other policy regimes the monetarist solution is, instead, the locally stable REE.

Keywords

InflationExpectationsFiscal and Monetary PolicyExplosive Price Paths
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 5 , November 2007 , pp. 665 - 690
Copyright
© 2007 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bassetto M. 2002 A game-theoretic view of the fiscal theory of the price level. Econometrica 70, 2167– 2195.Google Scholar
Blanchard O. and C. Kahn 1980 The solution of linear difference model under rational expectations. Econometrica 48, 1305– 1311.Google Scholar
Buiter W.H. 2002 The fiscal theory of the price level: A critique. Economic Journal 112, 459– 480.Google Scholar
Bullard J. 1994 Learning equilibria. Journal of Economic Theory 64, 468– 485.Google Scholar
Carlstrom C.T. and T.S. Fuerst 2001 Timing and real indeterminacy in monetary models. Journal of Monetary Economics 47, 285– 298.Google Scholar
Chow G. 1996 Dynamic Economics. Oxford: Oxford University Press.
Cochrane J.H. 1999 A frictionless view of U.S. inflation. NBER Macroeconomics Annual 13, 323– 384.Google Scholar
Cochrane J.H. 2005 Money as stock. Journal of Monetary Economics 52, 501– 528.Google Scholar
Evans G.W. and S. Honkapohja 1998 Economic dynamics with learning: New stability results. Review of Economic Studies 65, 23– 44.Google Scholar
Evans G.W. and S. Honkapohja 1999 Learning dynamics. In J. Taylor and M. Woodford (eds.), Handbook of Macroeconomics, vol. 1, 7, 449– 542. Amsterdan: Elsevier.
Evans G.W. and S. Honkapohja 2001 Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.
Evans G.W. and S. Honkapohja 2003 Expectations and the stability problem for optimal monetary policies. Review of Economics Studies 70, 807– 824.Google Scholar
Evans G.W. and G. Ramey 1998 Calculation, adaptation and rational expectations. Macroeconomics Dynamics 2, 156– 182.Google Scholar
Farmer R.E. 1999 The Economics of Self-Fulfilling Prophecies, 2nd ed. Cambridge, MA: MIT Press.
Howitt P. 1992 Interest rate control and nonconvergence to rational expectations. Journel of Political Economy 100, 776– 800.Google Scholar
Leeper E.M. 1991 Equilibria under “active” and “passive” monetary and fiscal policies. Journal of Monetary Economics 27, 129– 147.Google Scholar
Marimon R. 1997 Learning from learning in economics. In D. Kreps and K. Wallis (eds.), Advances in Economics and Econometrics: Theory and Applications, vol. 1, chap. 9, 278– 315. Cambridge: Cambridge University Press.
McCallum B.T. 2001 Indeterminacy, bubbles, and the fiscal theory of price level determination. Journal of Monetary Economics 47, 19– 30Google Scholar
McCallum B.T. 2003a Is the fiscal theory of the price level learnable? Scottish Journal of Political Economy 50, 634– 649.Google Scholar
McCallum B.T. 2003b Multiple-solution indeterminacies in monetary policy analysis. Journal of Monetary Economics 50, 1153– 1175.Google Scholar
Niepelt D. 2004 The fiscal myth of the price level. Quarterly Journal of Economics 119, 277– 300.Google Scholar
Preston B. 2005 Learning about monetary policy rules when long-horizon expectations matter. International Journal of Central Banking 1, 81– 126.Google Scholar
Sargent T.J. 1993 Bounded Rationality in Macroeconomics. Oxford: Oxford University Press.
Schönhofer M. 1999 Chaotic learning equilibria. Journal of Economic Theory 89, 1– 20.Google Scholar
Sims C.A. 1999 The precarious fiscal foundations of EMU. De Economist 147, 415– 436.Google Scholar
Wenzelburger J. 2000 Global convergence of adaptive learning in models of pure exchange. Economic Theory 19, 649– 672.Google Scholar
Woodford M. 2001 Fiscal requirements for price stability. Journal of Money, Credit and Banking 33, 669– 728.Google Scholar
Woodford M. 2003a Comment on: Multiple-solution indeterminacies in monetary policy analysis. Journal of Monetary Economics 50, 1177– 1188.Google Scholar
Woodford M. 2003b Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.