The Fiscal Theory of the Price Level: A Critique
22 Pages Posted: 8 Feb 2003
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: Suggested Citation