Price Determinacy under Non-Ricardian Fiscal Strategies

36 Pages Posted: 17 Jan 2008

Date Written: December 28, 2007

Abstract

This paper shows that there exist fiscal strategies that deliver equilibrium uniqueness in a monetary economy in which the central bank follows an interest rate peg. In contrast to the fiscal theory of the price level (FTPL), such strategies always satisfy a government intertemporal budget constraint. The government is able to rule out most prices using strategically its fiscal instruments, undercutting the private-market price whenever it is inconsistent with the fiscal targets. In the spirit of the FTPL, along the fiscal strategies of this paper the government does not follow a rule that mechanically links the fiscal surplus to the real value of its outstanding nominal debt. Like in the monetarist paradigm, the fiscal authority is forced to blink in face of an independent monetary policy, although in equilibrium the former achieves its own targets.

Keywords: Fiscal-monetary interactions, Fiscal Theory of the Price Level, interest rate peg, equilibrium (in)determinacy

JEL Classification: E31, E42, E61

Suggested Citation

Arce, Oscar, Price Determinacy under Non-Ricardian Fiscal Strategies (December 28, 2007). Banco de España Working Paper No. 0741. Available at SSRN: https://ssrn.com/abstract=1084833 or http://dx.doi.org/10.2139/ssrn.1084833

Oscar Arce (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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