Is the Fiscal Theory of the Price Level Learnable?

30 Pages Posted: 8 Nov 2010

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: September 2003

Abstract

This paper presents a prototype model for development of the fiscal theory of the price level.' In this simple setting, the fiscal theory's distinctiveness relies upon adoption of a bubble solution, rather than the rational-expectations fundamentals solution. The paper then shows that the fiscal solution is not adaptively learnable, by agents who estimate coefficients relevant for forecasting on the basis of available data, whereas the orthodox monetarist' solution exists and is learnable. Finally, it is argued that similar results should be expected to apply in models that are more general in various dimensions.

Suggested Citation

McCallum, Bennett T., Is the Fiscal Theory of the Price Level Learnable? (September 2003). NBER Working Paper No. w9961, Available at SSRN: https://ssrn.com/abstract=1703315

Bennett T. McCallum (Contact Author)

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