Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination

21 Pages Posted: 11 Sep 2000 Last revised: 9 Oct 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: March 1998

Abstract

The recently-developed fiscal theory of price level determination contends that there is an important class of policy rules in which there exists a unique rational expectations solution that shows the price level to be dependent upon fiscal policy and independent of monetary variables. The present paper argues, however, that there is an alternative solution to these models that has entirely traditional (or monetarist') properties. This latter solution is perhaps the more plausible since it is the solution that is typically regarded as the bubble-free fundamentals' solution. The argument involves a respecification of feasible instrument variables.

Suggested Citation

McCallum, Bennett T., Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination (March 1998). NBER Working Paper No. w6456, Available at SSRN: https://ssrn.com/abstract=226201

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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