Can the Fiscal Theory of the Price Level Explain UK Inflation in the 1970s?

29 Pages Posted: 20 Jan 2010

See all articles by Jingwen Fan

Jingwen Fan

Jinan University

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Date Written: January 2010

Abstract

We investigate whether the Fiscal Theory of the Price Level can deliver a reasonable explanation for UK inflation in the 1970s, a period in which the government greatly increased public spending without raising taxes and monetary policy was accommodative. The model is tested for its implied cointegration between inflation and government spending and for its dynamics by using the method of indirect inference, under which the modelÂ’s simulated behaviour is compared with the inflation time-series process. We find that the model is accepted in both respects.

Keywords: Bootstrap simulation, Fiscal Theory of the Price Level, Indirect inference, UK Inflation, Wald statistic

JEL Classification: E31, E37, E62, E65

Suggested Citation

Fan, Jingwen and Minford, Patrick, Can the Fiscal Theory of the Price Level Explain UK Inflation in the 1970s? (January 2010). CEPR Discussion Paper No. DP7630. Available at SSRN: https://ssrn.com/abstract=1539302

Jingwen Fan (Contact Author)

Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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