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American Economic Review: Vol. 91 No. 5 (December 2001)

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Is the Price Level Determined by the Needs of Fiscal Solvency?

Article 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.91.5.1221

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.

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Authors

Canzoneri, Matthew B. (Georgetown U)
Cumby, Robert E. (Georgetown U)
Diba, Behzad T. (Georgetown U)

JEL Classifications

E62: Fiscal Policy
E31: Price Level; Inflation; Deflation


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