TY  - JOUR
AU  - McCallum,Bennett T.
AU  - Nelson,Edward
TI  - Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12089
PY  - 2006
Y2  - March 2006
UR  - http://www.nber.org/papers/w12089
L1  - http://www.nber.org/papers/w12089.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu

Edward Nelson
Federal Reserve Board
Mail Stop 76, Monetary Affairs
20th and C Streets, N.W.
Washington, DC 20551
E-Mail: edward.nelson@frb.gov
AB  - The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability %u2013 and therefore plausibility %u2013 of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
ER  -