Bubbles and the Intertemporal Government Budget Constraint

Recent years have seen a protracted debate on the "fiscal theory of the price level". This doctrine is based on the intertemporal government budget constraint, which says that the real value of the government debt equals the discounted value of future government surpluses. It is observed that the intertemporal government budget constraint consists of the proposition that government debt management defines a portfolio strategy that has no bubble. Therefore the intertemporal government budget constraint is satisfied in models in which bubbles can be ruled out, and it fails in settings in which bubbles can occur in equilibrium.