THE FISCAL THEORY OF THE PRICE LEVEL PUZZLE: A NON-RICARDIAN VIEW

The fiscal theory of the price level says that the price level can be made determinate if thegovernment uses fiscal policies such that government liabilities explode unless the price inthe first period is at the “right” level. The policy implications are disturbing, as they callfor rather adventurous fiscal policies. We show that these disturbing policy implicationsare specific to the “Ricardian” models that have been used to develop the theory. Bymoving to non-Ricardian models, we see that price determinacy is consistent withreasonable fiscal policies.[...]