Open AccessTHE FISCAL THEORY OF THE PRICE LEVEL: A CRITIQUE *
Author(s) -
Buiter Willem H.
Publication year - 2002
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/1468-0297.00726
Subject(s) - economics , economic history , volume (thermodynamics) , keynesian economics , quantum mechanics , physics
This paper argues that the `fiscal theory of the price level' (FTPL) has feet of clay. The source of the problem is a fundamental economic misspecification. The FTPL confuses two key building blocks of a model of a market economy: budget constraints, which must be satisfied identically, and market clearing or equilibrium conditions. The FTPL asssumes that the government's intertemporal budget constraint needs to be satisfied only in equilibrium . This economic misspecification has far‐reaching implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. It produces a rash of contradictions and anomalies.