A Requiem for the Fiscal Theory of the Price Level

35 Pages Posted: 8 Nov 2019

See all articles by Roger Farmer

Roger Farmer

University of California, Los Angeles (UCLA)

Pawel Zabczyk

International Monetary Fund MCMMP

Date Written: October 2019


The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.

Keywords: Real interest rates, Negative interest rates, Economic theory, Interest rate policy, Interest rate modelling, fiscal policy, monetary policy, fiscal theory of the price level, price level determination, overlapping generations model, dynamic efficiency, WP, real interest rate, non-generic, indeterminacy, generation model, price level

JEL Classification: E31, E58, H62, E01, G21, E52, H83, I3, Z13

Suggested Citation

Farmer, Roger and Zabczyk, Pawel, A Requiem for the Fiscal Theory of the Price Level (October 2019). IMF Working Paper No. 19/219, Available at SSRN: https://ssrn.com/abstract=3482304

Roger Farmer (Contact Author)

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Pawel Zabczyk

International Monetary Fund MCMMP ( email )

International Monetary Fund
700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://pawel.zabczyk.com

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