American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Is the Price Level Determined by the Needs of Fiscal Solvency?
American Economic Review
vol. 91,
no. 5, December 2001
(pp. 1221–1238)
Abstract
The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level "jumps" to assure fiscal solvency. In this non-Ricardian regime, fiscal policy--not monetary policy--provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes.Citation
Canzoneri, Matthew, B., Robert E. Cumby, and Behzad T. Diba. 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?" American Economic Review, 91 (5): 1221–1238. DOI: 10.1257/aer.91.5.1221JEL Classification
- E62 Fiscal Policy
- E31 Price Level; Inflation; Deflation