The Fallacy of the Fiscal Theory of the Price Level, Again

53 Pages Posted: 6 Feb 2001

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Multiple version iconThere are 2 versions of this paper

Date Written: June 2000

Abstract

The Fiscal Theory of the Price Level (FTPL) rejects the fundamental 'Ricardian' proposition, that the government budget constraint must hold identically, that is for all admissible values of the variables entering the budget constraint. Accordingly, if the government is to meet its contractual debt obligations, one of its instruments must be determined residually to ensure the budget constraint is satisfied. If the government overdetermines its fiscal-financial-monetary policy programme, contractual debt obligations will not be met. The FTPL asserts that even when the government overdetermines its policy programme, contractual debt obligations will always be met. The general price level plays the role of a default premium or discount. The paper shows that the FTPL is a fallacy and leads to anomalies and contradictions.

Keywords: Fiscal theory of the price level, Ricardian fiscal rules, government budget constraint, price level indeterminacy

JEL Classification: E31, E41, E51, E52, E62, E63

Suggested Citation

Buiter, Willem H., The Fallacy of the Fiscal Theory of the Price Level, Again (June 2000). Available at SSRN: https://ssrn.com/abstract=258932 or http://dx.doi.org/10.2139/ssrn.258932

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

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