Policy Interaction, Learning and the Fiscal Theory of Prices

University of Oregon, Economics Working Paper No. 241; Bank of Finland Discussion Paper No. 18/2002

32 Pages Posted: 22 Apr 2003

See all articles by George W. Evans

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2002

Abstract

We investigate both the rational explosive inflation paths studied by McCallum (2001) and the classification of fiscal and monetary policies proposed by Leeper (1991) for stability under learning of rational expectations equilibria (REE). Our first result is that the fiscalist REE in the model of McCallum (2001) is not locally stable under learning. By contrast, in the setting of Leeper (1991), different possibilities can obtain. We find, in particular, that there are parameter domains for which the fiscal theory solution - in which fiscal variables affect the price level - can be a stable outcome under learning. For other parameter domains, the monetarist solution is the stable equilibrium.

Keywords: Inflation, expectations, fiscal and monetary policy, explosive price paths

JEL Classification: E52, E31, D84

Suggested Citation

Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, Policy Interaction, Learning and the Fiscal Theory of Prices (August 28, 2002). University of Oregon, Economics Working Paper No. 241; Bank of Finland Discussion Paper No. 18/2002, Available at SSRN: https://ssrn.com/abstract=322660 or http://dx.doi.org/10.2139/ssrn.322660

George W. Evans

University of Oregon - Department of Economics ( email )

1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

Seppo Honkapohja (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Aalto University - School of Business

Finland

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