DP14680 The Fiscal Theory of the Price Level with a Bubble
|Author(s):||Markus K Brunnermeier, Sebastian Merkel, Yuliy Sannikov|
|Publication Date:||April 2020|
|Keyword(s):||Fiscal policy, Monetary Economics|
|JEL(s):||E44, E52, E63|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14680|
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.