The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence
IGIER Working Paper No. 257
37 Pages Posted: 5 May 2004
Date Written: April 2004
This paper aims to test some implications of the Fiscal theory of the price level (FTPL). We develop a model similar to Leeper (1991) and Woodford (1996), but extended so to generate real effects of fiscal policy also in the Ricardian regime, via an OLG demographic structure. We test on the data the predictions of the FTPL as incorporated in the model. We find that the US fiscal policy in the period 1960-1979 can be classified as Non-Ricardian, while it is Ricardian since 1990. According to our analysis, the fiscal theory of the price level characterizes one phase of the post-war US history.
Keywords: Fiscal theory of the price level, monetary and fiscal policy interaction, VAR models, fiscal shocks
JEL Classification: E42, E58, E61, E63
Suggested Citation: Suggested Citation