The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence

IGIER Working Paper No. 257

37 Pages Posted: 5 May 2004

See all articles by Luca Sala

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Date Written: April 2004

Abstract

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

Sala, Luca, The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence (April 2004). IGIER Working Paper No. 257. Available at SSRN: https://ssrn.com/abstract=538802 or http://dx.doi.org/10.2139/ssrn.538802

Luca Sala (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)

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