The Impact of Fiscal Policy on Prices: Does the Fiscal Theory of Price Level Matter in Latvia?

The paper studies the indirect impact of fiscal policy on prices. Exploring VAR in two variables, primary balance ratio to GDP and public debt ratio to GDP, and calculating the impulse response functions to innovations in the former variable, it supposes an evidence of the exogeneity of Latvian general government budget balance. Borrowing from the recently developed Fiscal Theory of Price Level (FTPL) it implies that deterioration of the budget balance may lead to an upward price adjustment needed to assure fiscal solvency.