The fiscal theory of the price level in an open economy

Daniel, Betty C.

doi:10.1016/s0304-3932(01)00077-0

Cited by 53 publications

(34 citation statements)

References 7 publications

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“…We demonstrate in this case that even if the other country implements Regime M, then inflation in the monetary union is determined by the Regime F country, regardless of the country's size. This analysis draws on work by Sims (1997), Bergin (2000), Dupor (2000), Daniel (2001) and Daniel and Shiamptanis (2011).…”

Section: How Fiscal Policy Can Undermine Monetary Control Of Inflationmentioning

confidence: 99%

Perceptions and Misperceptions of Fiscal Inflation

Leeper

Walker

2012

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The Great Recession and worldwide financial crisis have exploded fiscal imbalances and brought fiscal policy and inflation to the forefront of policy concerns. Those concerns will only grow as aging populations increase demands on government expenditures in coming decades. It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. Monetization can be inflationary. But it is a misperception that this is the only channel for fiscal inflations. Nominal bonds, the predominant form of government debt in advanced economies, derive their value from expected future nominal primary surpluses and money creation; changes in the price level can align the market value of debt to its expected real backing. This introduces a fresh channel, not requiring explicit monetization, through which fiscal deficits directly affect inflation. The paper describes various ways in which fiscal policy can directly affect inflation and explains why these fiscal effects are difficult to detect in time series data.

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Section: How Fiscal Policy Can Undermine Monetary Control Of Inflationmentioning

confidence: 99%

Perceptions and Misperceptions of Fiscal Inflation

Leeper

Walker

2012

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show abstract

“…[2]), (7) and (10) can be combined to c t+1 ct = q t+1 c * t+1 qtc * t ∀t ≥ 0, implying that domestic and foreign consumption (in terms of 1 In fact, income tax revenues are bounded by the maximum of the Laffer curve.…”

Section: Resultsmentioning

confidence: 99%

“…1 In particular, we assume that the labor income tax rate is set equal to a constant τ t = τ ∈ (0, 1). For simplicity, we assume that government expenditures g t equal zero.…”

Section: The Modelmentioning

confidence: 99%

“…The simple reason is that by pegging the exchange rate, the home economy can "import" risk-free foreign interest rates. This novel argument in favor of fixed exchange rates relates to the idea of determining the price level by pegging the exchange rate and to the "Fiscal Theory of the Price Level" applied for open economies (see [4] and [1]), which typically disregard the possibility of default.…”

Section: Introductionmentioning

confidence: 99%

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