To Solve Inflation, First Solve Deficits, This
Theory Advises
https://www.wsj.com/articles/to-solve-inflation-first-solve-deficits-this-theory-advises-11667391310
Greg Ip:
In a 1981 paper, though, Thomas Sargent ... and Neil Wallace challenged this orthodoxy: A government that runs unsustainable deficits will, one day, fail to sell enough bonds, at which point the central bank will have to finance the shortfall by printing money. The central bank may initially try to control inflation by raising interest rates sharply. But this will widen deficits further and ultimately make inflation even harder to control. “Persistent high inflation is always and everywhere a fiscal phenomenon, in which the central bank is a monetary accomplice,” wrote Mr. Sargent, currently a professor at New York University and a senior fellow at Hoover Institution, in 2013.
The public will anticipate this eventuality long before it happens and act in ways that drive inflation up now, not in the future, argues Hoover Institution economist John Cochrane
CRITIQUES OF FTPL:
The Fiscal Theory of the Price Level: A Critique
https://www.jstor.org/stable/798516
This paper argues that the ‘fiscal theory of the price level' (FTPL) has feet of clay. The source of the problem is a fundamental economic misspecification. The FTPL confuses two key building blocks of a model of a market economy: budget constraints, which must be satisfied identically, and market clearing or equilibrium conditions. The FTPL asssumes that the government's intertemporal budget constraint needs to be satisfied only in equilibrium. This economic misspecification has far‐reaching implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. It produces a rash of contradictions and anomalies.
https://www.wsj.com/articles/to-solve-inflation-first-solve-deficits-this-theory-advises-11667391310
Greg Ip:
In a 1981 paper, though, Thomas Sargent ... and Neil Wallace challenged this orthodoxy: A government that runs unsustainable deficits will, one day, fail to sell enough bonds, at which point the central bank will have to finance the shortfall by printing money. The central bank may initially try to control inflation by raising interest rates sharply. But this will widen deficits further and ultimately make inflation even harder to control. “Persistent high inflation is always and everywhere a fiscal phenomenon, in which the central bank is a monetary accomplice,” wrote Mr. Sargent, currently a professor at New York University and a senior fellow at Hoover Institution, in 2013.
The public will anticipate this eventuality long before it happens and act in ways that drive inflation up now, not in the future, argues Hoover Institution economist John Cochrane
CRITIQUES OF FTPL:
The Fiscal Theory of the Price Level: A Critique
https://www.jstor.org/stable/798516
This paper argues that the ‘fiscal theory of the price level' (FTPL) has feet of clay. The source of the problem is a fundamental economic misspecification. The FTPL confuses two key building blocks of a model of a market economy: budget constraints, which must be satisfied identically, and market clearing or equilibrium conditions. The FTPL asssumes that the government's intertemporal budget constraint needs to be satisfied only in equilibrium. This economic misspecification has far‐reaching implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. It produces a rash of contradictions and anomalies.
The fallacy of the fiscal theory of the price level
– one last time
http://www.economics-ejournal.org/dataset/PDFs/journalarticles_2018-48.pdf
http://www.economics-ejournal.org/dataset/PDFs/journalarticles_2018-48.pdf