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The Fiscal Theory of the Price Level in a World of Low Interest Rates

Author

Listed:
  • Marco Bassetto

    (Centre for Macroeconomics (CFM)
    Federal Reserve Bank of Chicago
    Institute for Fiscal Studies
    University College London)

  • Wei Cui

    (Centre for Macroeconomics (CFM)
    University College London)

Abstract
A central equation for the fiscal theory of the price level (FTPL) is the government budget constraint (or "government valuation equation"), which equates the real value of government debt to the present value of fiscal surpluses. In the past decade, the governments of most developed economies have paid very low interest rates, and there are many other periods in the past in which this has been the case. In this paper, we revisit the implications of the FTPL in a world where the rate of return on government debt may be below the growth rate of the economy, considering different sources for the low returns: dynamic inefficiency, the liquidity premium of government debt, or its favorable risk profile.

Suggested Citation

  • Marco Bassetto & Wei Cui, 2017. "The Fiscal Theory of the Price Level in a World of Low Interest Rates," Discussion Papers 1731, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1731
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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