Contrary to the Unpleasant Monetarist Arithmetic of Sargent and Wallace (1981), FTPL at first does not assume that the central bank increases money supply and prices, aiming to make real public debt sustainable; also there is no expected monetization.
On account of this muddle, a modern view on FTPL is that it builds implicitly on the assumption of an institutional agent who precludes a government bankruptcy (Bassetto, 2008).
Tutino and Zarazaga (2014: 3) note that, given the strong assumptions of some FTPL
models, hyperinflation can emerge when it is expected "even if the money supply is kept constant." That expectation results in an explosive rise in the velocity of money without any change in the money supply (see McCallum and Nelson 2005).
We extend the FTPL
model in Daniel and Shiamptanis (2012) to allow for a nonlinear fiscal policy rule, stochastic output growth rate, a second fiscal limit on the change in the primary surplus, and to allow the authorities to switch back to the original regime.
It's hard in this space to explain all the subplots that were unfolding and to ID the complex cast of characters, including the hard-nosed, dedicated FTPL
; Citizens to Save Troy Public Library (CSTPL); and the anti-tax group Troy Citizens United, which created false ballot proposals to counter the "real" proposal when the library attempted to become an independent library that could be covered by its own millage levee.
In contrast to the traditional monetary view or the monetarist unpleasant arithmetic, proponents of the fiscal theory of the price level (FTPL
) view argue that the government budget constraint, which relates the real value of the debt stock to the discounted present value of expected primary surpluses in the future, is indeed an equilibrium condition, but this does not mean that the government has to follow policies that are "Ricardian".
Since there is some empirical evidence favouring the non-Ricardian assumption of the FTPL
, we will start our analysis with the budget balance equation of a government:
government issues mostly non-state-contingent debt, we interpret changes in taxes, inflation, and interest rates as ways in which the government can make the return on its debt state-contingent, as suggested by the FTPL
To analyse the applicability of FTPL
theory in accordance with the Ricardian equivalence theorem the methodology suggested by Canzoneri, et al.
There is ongoing debate about whether faster inflation would occur because the Federal Reserve would eventually be forced to support the government's future debt-financed expenditures through monetary accommodation or whether a sudden realignment of prices could occur even without an independent or fiscally induced monetary expansion--following the predictions of the so-called fiscal theory of the price level (FTPL
A well-known theoretical framework that enables one to capture the effects of fiscal policy on the dynamic behavior of nominal variables has been proposed by the so-called 'fiscal theory of the price level' (FTPL
) [Woodford, 1994, 1995, 2001b; Sims, 1994; Cochrane, 1999; Kocherlakota and Phelan, 1999].