Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences / Bennett T. McCallum, Edward Nelson.

Format:

Book

Author/Creator:

McCallum, Bennett T.

Contributor:

National Bureau of Economic Research.

Nelson, Edward.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12089.

NBER working paper series no. w12089

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Monetary and Fiscal Theories of the Price Level

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.

Notes:

Print version record

March 2006.