Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination
The recently-developed fiscal theory of price level determination contends that there is an important class of policy rules in which there exists a unique rational expectations solution that shows the price level to be dependent upon fiscal policy and independent of monetary variables. The present paper argues, however, that there is an alternative solution to these models that has entirely traditional (or monetarist') properties. This latter solution is perhaps the more plausible since it is the solution that is typically regarded as the bubble-free fundamentals' solution. The argument involves a respecification of feasible instrument variables.
Published: Journal of Monetary Economics, Vol. 47, no. 1 (February 2001): 19-30