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.