DP5479 Long-Term Public Debt and the Fiscal Theory of the Price Level

Author(s): Gaetano Bloise, Pietro Reichlin
Publication Date: January 2006
Keyword(s): fiscal policy, fiscal theory of the price level, indeterminacy, monetary policy, public debt
JEL(s): E31, E42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5479

The fiscal theory of the price level asserts that the price level is determined by the ratio of outstanding public nominal debt into the present value of real primary budget surpluses of the government. We here argue that the logic of the fiscal theory fails when at least part of the public debt takes the form of securities of infinite maturity. Indeed, no equilibrium restriction prevents the occurrence of a speculative bubble on long-term public debt, so as to balance public budget intertemporally in the case of an unexpected increase in the price level. Thus, the price level is indeterminate.