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


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:

Willem H. Buiter (Contact Author)

Citigroup New York

Citigroup Global Markets Inc
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Centre for Economic Policy Research (CEPR)

United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Columbia University ( email )

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