THE FISCAL THEORY OF THE PRICE LEVEL: A CRITIQUE *

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.