scholarly journals Testing the Fiscal Theory of Price Level in Case of Pakistan

2008 ◽  
Vol 47 (4II) ◽  
pp. 763-778
Author(s):  
Attiya Y. Javid ◽  
Umaima Arif ◽  
Abdul Sattar
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Public Debt ◽  
Price Level ◽  
Equilibrium Path ◽  
Budget Deficits ◽  
Monetary Policies ◽  
The Real ◽  
Real Value ◽  
Fiscal Solvency

There are two competing views of the interaction between monetary and fiscal policy and their effects on price stability for policy-maker’s point of view. In the classical view, in Ricardian regimes it is the demand for liquidity and its evolution over time that determines prices. In such a regime fiscal policy is passive, which implies that government bonds are not net wealth [Barro (1974)], and monetary policy works through the interest rate or another instrument to determine prices. In the opposite view which is more recent, a non-Ricardian regime will prevail whenever fiscal policy becomes active1 and does not accommodate or adjust primary surpluses to guarantee fiscal solvency. As a result, the Ricardian equivalence do not hold, and the increase in nominal public debt to finance persistent budget deficits is perceived by private agents as an increase in nominal wealth. In fiscal dominant regime the government’s fiscal policy becomes sustainable through debt deflation that is an increase in prices that wash away the real value of public debt and in turn the real value of financial wealth until demand equals supply and a new equilibrium is reached. In this regime prices are determined by fiscal policy, and inflation becomes a fiscal phenomenon. If, on the other hand, primary surpluses follow an arbitrary process, then the equilibrium path of prices is determined by the requirement known as fiscal solvency; that is, the price level has to jump to satisfy a present value budget constraint called non-Ricardian regime. The basic distinction between the two regimes is that in non-Ricardian regime fiscal policy plays the role where as in Ricardian regime monetary policy provides stability in prices. In FTPL, the results of fiscal and monetary policies depend on which policy has dominant characteristics. The consequences of policies differ depending on the active and passive characteristics of the policy and depending on the characteristics of the following policy. If the policy mix is such that monetary policy is active and fiscal policy is passive, fiscal policy accommodates monetary policies; these policies are called dominant monetary policy by Sargent and Wallace (1981) and Ricardian regime by Woodford (1994, 1995).

scholarly journals The Coordination of Fiscal and Monetary Policies in Pakistan: An Empirical Analysis 1980–2011

2012 ◽  
Vol 51 (4II) ◽  
pp. 695-704
Author(s):  
Zubaria Andlib ◽  
Azra Khan ◽  
Ihtsham Ul Haq Ihtsham Ul Haq
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Inflation Rate ◽  
Aggregate Demand ◽  
Budget Deficits ◽  
Monetary Policies ◽  
Domestic Debt ◽  
Perceptions And Expectations ◽  
Ultimate Objective ◽  
The Impact

Fiscal policy concerned with the government’s choice regarding the optimal use of taxation and government spending to control and adjust the aggregate demand in the economy. Monetary policy refers to the central bank’s control regarding the availability of credit in the economy to achieve the objective of price stability and this control can be exerted through money supply and interest rate channel. The ultimate objective of the both policies is to maximise the overall welfare of the society which can be achieved by keeping the inflation rate low and employment at its potential level. There are number of channels in which fiscal policy can impinge on monetary policy. An expansionary fiscal policy leads to an expansionary monetary policy, which may in turn fuel inflation and appreciate the domestic currency and that cause deterioration in the balance of payments. On the other hand if government finances the deficit through the markets (in a non-monetary way) then the fear of crowding out of the private sector arise in the economy. On external side when a country is depending on foreign funding of domestic debt, this results in deterioration in the exchange rate and balance of payment. Another more direct channel of fiscal policy is the impact of indirect taxes on price level. Besides this, perceptions and expectations of the general public about the large and on going budget deficits and resultant borrowings requirements may prompt a lack of confidence in the economic prospects. At the same time when people realise that government is borrowing for its own good, they will conclude that this can lead to higher taxation levels in future and consequently they consume less and save more, that is so called Recardian equivalence.

scholarly journals Is the Price Level Determined by the Needs of Fiscal Solvency?

2001 ◽  
Vol 91 (5) ◽  
pp. 1221-1238 ◽  
Author(s):  
Matthew B Canzoneri ◽  
Robert E Cumby ◽  
Behzad T Diba
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Price Level ◽  
Government Debt ◽  
Equilibrium Price ◽  
Price Determination ◽  
Fiscal Solvency ◽  
Nominal Anchor

The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level “jumps” to assure fiscal solvency. In this non-Ricardian regime, fiscal policy—not monetary policy—provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes. (JEL E60, E63)

scholarly journals A Requiem for the Fiscal Theory of the Price Level

2019 ◽  
Vol 19 (219) ◽  
Author(s):  
Roger Farmer ◽  
Pawel Zabczyk
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Real Interest Rate ◽  
Price Level ◽  
Theoretical Models ◽  
Realistic Model ◽  
Good Combination ◽  
Monetary Policies ◽  
Two Generations ◽  
Monetary And Fiscal Policy

The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.

Global Financial Crisis and Its Impact on Russia

2009 ◽  
pp. 9-27 ◽  
Author(s):  
A. Kudrin
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Financial Crisis ◽  
Central Bank ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Real Economy ◽  
Energy Prices ◽  
Russian Government ◽  
The Real

The article examines the causes of origin and manifestation of the current global financial crisis and the policies adopted in developed countries in 2007—2008 to deal with it. It considers the effects of the financial crisis on Russia’s economy and monetary policy of the Central Bank in the current conditions as well as the main guidelines for the fiscal policy under different energy prices. The measures for fighting the crisis that the Russian government and the Central Bank use to support the real economy are described.

scholarly journals Asymmetric effects of monetary policy in Brazil

2009 ◽  
Vol 39 (2) ◽  
pp. 277-300 ◽  
Author(s):  
Edilean Kleber da Silva Bejarano Aragón ◽  
Marcelo Savino Portugal
Keyword(s):  
Monetary Policy ◽  
Monetary Shocks ◽  
Monetary Policies ◽  
The Real ◽  
Asymmetric Effects ◽  
Real Effects ◽  
Markov Switching Models ◽  
Switching Models ◽  
The Business Cycle ◽  
Negative Shock

In this paper, we check whether the effects of monetary policy actions on output in Brazil are asymmetric. Therefore, we estimate Markov-switching models that allow positive and negative shocks to affect the growth rate of output in an asymmetric fashion in expansion and recession states. In general, results show that: i) the real effects of negative monetary shocks are larger than those of positive shocks in an expansion; ii) in a recession, the real effects of positive and negative shocks are the same; iii) there is no evidence of asymmetry between the effects of countercyclical monetary policies; and iv) it is not possible to assert that the effects of a positive (or negative) shock are dependent upon the phase of the business cycle.

scholarly journals An econometric analysis of the effectiveness of fiscal and monetary policies in India

2021 ◽  
Author(s):  
Anand Nadar
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Fiscal Policy ◽  
Money Supply ◽  
Series Data ◽  
Monetary Policies ◽  
Indian Economy ◽  
Long Run ◽  
Short Run ◽  
Bound Test

This study investigatesthe effectiveness of fiscal policy and monetary policy in India. We collected thetime series data for India ranging from 1960 to 2019 from World Development Indicator (WDI). Weapplied the bound test co-integration approach to check the long-run relationship between fiscalpolicy, monetary policy, and economic growth in the context of Indian economy. The short-run andlong-run effects of fiscal policy and monetary policy have been estimated using ARDL models. Theresults showed that there is a long-run relationship between fiscal and monetary policies witheconomic growth. The estimated short-run coefficients indicated that a few immediate short runimpacts of fiscal and monetary policies are insignificant. However, the short-run impacts becomesignificant as time passes. The long-run results suggested that the long-run impact of both fiscal andmonetary policies on economic growth are positive and significant. More specifically, the GDP levelincreases if the money supply and government expenditure increase (Expansionary fiscal andmonetary policies). On the other hand, the GDP level decreasesif the money supply and governmentexpenditure decrease (contractionary fiscal and monetary policies). Therefore, this studyrecommends to use expansionary policies to spur the Indian economy.

Interakcje polityki pieniężnej i fiskalnej a niezależność banku centralnego – przegląd możliwych podejść modelowych w badaniach empirycznych

2020 ◽  
Author(s):  
Ryszard Kokoszczyński ◽  
Joanna Mackiewicz-Łyziak
Keyword(s):  
Fiscal Policy ◽  
Price Level ◽  
Empirical Studies ◽  
Central Banks ◽  
Overwhelming Majority ◽  
Monetary Policies ◽  
Sustainable Policy ◽  
Monetary And Fiscal Policy ◽  
Simple Models

There are numerous theoretical and empirical studies on interactions between monetary and fiscal policy. Even if the independence of central banks affects those interactions, it has rarely been directly included in those studies. In this chapter, we present two general approaches to empirical studies on interactions between those two policies and the possibilities for inclusion of independence of central banks in their modelling. Generally, the first approach has poor theoretic background and relies on simple models describing rules for fiscal and monetary policies. Those models also include proxies for some aspects of fiscal policy. Similarly, some simple measures usually address the independence of central banks. The second approach most often roots in the fiscal theory of the price level. The overwhelming majority of presented studies report a significant impact of the central banks’ independence in the form of a more sustainable policy using the first approach.

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