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The Fiscal Theory of the Price Level
A comprehensive account of how government deficits and debt drive inflation
Where do inflation and deflation ultimately come from? The fiscal theory of the price level offers a simple answer: Prices adjust so that the real value of government debt equals the present value of taxes less spending. Inflation breaks out when people don't expect the government to fully repay its debts. The fiscal theory is well suited to today's economy: Financial innovation undermines money demand, and central banks don't control the money supply or aggressively change interest rates, invalidating classic theories, while large debts and deficits threaten inflation and constrain monetary policy. This book presents a comprehensive account of this important theory from one of its leading developers and advocates.
John Cochrane aims to make fiscal theory useful as a conceptual framework and modeling tool, and for analyzing history and policy. He merges fiscal theory with standard models in which central banks set interest rates, giving a novel account of monetary policy. He generalizes the theory to explain data and make realistic predictions. For example, inflation decreases in recessions despite deficits because discount rates fall, raising the value of debt; specifying that governments promise to partially repay debt avoids classic puzzles and allows the theory to apply at all times, not just during periods of high inflation. Cochrane offers an extensive rethinking of monetary doctrines and institutions through the eyes of fiscal theory, and analyzes the era of zero interest rates and post-pandemic inflation.
Filled with research by Cochrane and others, The Fiscal Theory of the Price Level offers important new insights about fiscal and monetary policy.
Where do inflation and deflation ultimately come from? The fiscal theory of the price level offers a simple answer: Prices adjust so that the real value of government debt equals the present value of taxes less spending. Inflation breaks out when people don't expect the government to fully repay its debts. The fiscal theory is well suited to today's economy: Financial innovation undermines money demand, and central banks don't control the money supply or aggressively change interest rates, invalidating classic theories, while large debts and deficits threaten inflation and constrain monetary policy. This book presents a comprehensive account of this important theory from one of its leading developers and advocates.
John Cochrane aims to make fiscal theory useful as a conceptual framework and modeling tool, and for analyzing history and policy. He merges fiscal theory with standard models in which central banks set interest rates, giving a novel account of monetary policy. He generalizes the theory to explain data and make realistic predictions. For example, inflation decreases in recessions despite deficits because discount rates fall, raising the value of debt; specifying that governments promise to partially repay debt avoids classic puzzles and allows the theory to apply at all times, not just during periods of high inflation. Cochrane offers an extensive rethinking of monetary doctrines and institutions through the eyes of fiscal theory, and analyzes the era of zero interest rates and post-pandemic inflation.
Filled with research by Cochrane and others, The Fiscal Theory of the Price Level offers important new insights about fiscal and monetary policy.
584 pages, Hardcover
First published January 1, 2023
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Displaying 1 - 3 of 3 reviews
May 26, 2023
A long journey (some four months).
I started this work with a degree of trepidation. Cochrane is always a rigorous read and ideologically I am in a different place (hint: in the Keynesian realm). Still, the time was well spent.
As I read the book for the purpose of helping an academic friend incorporate its content into a graduate course, I will refrain from saying much beyond that the inflationary story is more nuanced than the book argues. However, that having been said, Dr. Cochrane is a brilliant economist and this work will only strengthen his reputation.
I started this work with a degree of trepidation. Cochrane is always a rigorous read and ideologically I am in a different place (hint: in the Keynesian realm). Still, the time was well spent.
As I read the book for the purpose of helping an academic friend incorporate its content into a graduate course, I will refrain from saying much beyond that the inflationary story is more nuanced than the book argues. However, that having been said, Dr. Cochrane is a brilliant economist and this work will only strengthen his reputation.
January 22, 2023
Cochrane provides a great overview of the relationships between fiscal policy, monetary policy, and inflation. I’ve long thought about and read about these connections so it was great to read it all in one place.
While I have some issues with the assumption of fiscal dominance (active) over monetary dominance (possible) in explaining inflation and the book has many equations and can get dense at times, I highly recommend this book for economists but also interested folks who just want to jump pass the equations.
I also had the opportunity to interview Dr. Cochrane on Let People Prosper Show podcast here about his book and current events: https://vanceginn.substack.com/p/105-....
While I have some issues with the assumption of fiscal dominance (active) over monetary dominance (possible) in explaining inflation and the book has many equations and can get dense at times, I highly recommend this book for economists but also interested folks who just want to jump pass the equations.
I also had the opportunity to interview Dr. Cochrane on Let People Prosper Show podcast here about his book and current events: https://vanceginn.substack.com/p/105-....
June 23, 2023
Un libro duro de leer. Se trata de un manual de economía perfectamente. Lo he disfrutado y lo releeré dentro de unos años para ampliar conocimientos. Gran relación con las expectativas racionales de Lucas y las aportaciones neoclásicas.
Displaying 1 - 3 of 3 reviews