The Fiscal Theory of the Price Level: A Critique

22 Pages Posted: 8 Feb 2003

See all articles by Willem H. Buiter

Willem H. Buiter

Citigroup New York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University

Abstract

This paper argues that the 'fiscal theory of the price level' (FTPL) has feet of clay. The source of the problem is a fundamental misspecification. The FTPL confuses two key building blocks of a model of a market economy: budget constraints, which must be satisfied identically, and market clearing or equilibrium conditions. The FTPL assumes that the government's intertemporal budget constraint needs to be satisfied only. This economic misspecification has far-reaching implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. It produces a rash of contradictions and anomalies.

Suggested Citation

Buiter, Willem H., The Fiscal Theory of the Price Level: A Critique. The Economic Journal, Vol. 112, pp. 459-480, 2002. Available at SSRN: https://ssrn.com/abstract=320556

Willem H. Buiter (Contact Author)

Citigroup New York

Citigroup Global Markets Inc
388 Greenwich Street
New York, NY 10013
United States
+12128162363 (Phone)
+12128168970 (Fax)

HOME PAGE: http://willembuiter.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
11
Abstract Views
772
PlumX Metrics