Is the Price Level Determined by the Needs of Fiscal Solvency?
- (pp. 1221-1238)
AbstractThe 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.
CitationCanzoneri, 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
- E62 Fiscal Policy
- E31 Price Level; Inflation; Deflation