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.