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The fiscal theory of the price level in a world of low interest rates

Bassetto, M; Cui, W; (2018) The fiscal theory of the price level in a world of low interest rates. Journal of Economic Dynamics and Control , 89 pp. 5-22. 10.1016/j.jedc.2018.01.006. Green open access

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Abstract

A central equation for the fiscal theory of the price level (FTPL) is the government budget constraint (or “government valuation equation”), which equates the real value of government debt to the present value of fiscal surpluses. In the past decade, the governments of most developed economies have paid very low interest rates, and there are many other periods in the past in which this has been the case. In this paper, we revisit the implications of the FTPL in a world where the rate of return on government debt may be below the growth rate of the economy, considering different sources for the low returns: dynamic inefficiency, the liquidity premium of government debt, or its favorable risk profile

Type: Article
Title: The fiscal theory of the price level in a world of low interest rates
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jedc.2018.01.006
Publisher version: https://doi.org/10.1016/j.jedc.2018.01.006
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Fiscal theory of the price level, Inflation, Government debt, Interest rates, Dynamic inefficiency
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10045948
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