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Disturbing the fiscal theory of the price level: Can it fit the eu-15?

By António Afonso

Abstract

With the fiscal theory of the price level (FTPL), Leeper-Sims-Woodford (LSW) argued that the government budget constraint plays a key role in determining the price level. Indeed, there could even be a dispute vis-à-vis the role of monetary policy in the formation of the price level. Apart from several theoretical criticisms, also addressed in the discussion given in this paper, the attempts to validate empirically the novel theory are, so far, rather sparse. Therefore, one of the purposes of this paper is to tentatively assess the possible empirical evidence, concerning the FTPL, for the EU-15 countries.Fiscal theory of the price level; fiscal policy; EU-15; panel data models

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