Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences

The fiscal theory of the price level (FTPL) has attracted muchattention but disagreement remains concerning its defining characteristics.Some writers have emphasized implications regarding interest-ratepegging and determinacy of rational expectations solutions,whereas others have stressed its capacity to generate equilibriain which price-level trajectories mimic those of bonds and differdrastically from those of money supplies. We argue that theFTPL attained prominence precisely because it appeared to providea theory whose implications differ greatly from conventionalmonetary analysis; accordingly we review monetarist writingsto identify the primary distinctions. In addition, we reviewrecent findings concerning learnability—and thereforeplausibility—of competing rational expectations 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 coordinationis not necessary for macroeconomic stability. Footnotes ¹ E-mail addresses: bmccallum{at}cmu.edu; edward.nelson{at}stls.frb.org