Discussion paper

DP14680 The Fiscal Theory of the Price Level with a Bubble

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.

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Citation

Brunnermeier, M, S Merkel and Y Sannikov (2020), ‘DP14680 The Fiscal Theory of the Price Level with a Bubble‘, CEPR Discussion Paper No. 14680. CEPR Press, Paris & London. https://cepr.org/publications/dp14680