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Title: The Fiscal Theory of the Price Level with a Bubble

Author(s): Markus K Brunnermeier, Sebastian Merkel and Yuliy Sannikov

Publication Date: April 2020

Keyword(s): Fiscal policy and Monetary Economics

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy's growth rate.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14680

Bibliographic Reference

Brunnermeier, M, Merkel, S and Sannikov, Y. 2020. 'The Fiscal Theory of the Price Level with a Bubble'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14680