Fiscal Policy, Interest Rate Shocks and Prices.

Journal article

Governments have, in the past, sometimes combined a monetary policy involving setting nominal interest rates with a fiscal policy that only weakly targeted its debt stock. This policy regime has recently been examined under the heading of a "fiscal theory of the price level." In this paper we examine what the consequences would be for the price level of a shock to interest rates in this regime. We show that in a variety of models, that relax the assumptions underlying the "fiscal theory of the price level," a temporary increase in interest rates will raise the price level. This suggests one possible explanation for the "prices puzzle" noted by Sims.

Authors: Leith, C; Warren, P; Wren-Lewis, S

• Journal: Economic Modelling
• Volume: 20
• Publication date: 2003-01-01
• ISSN: 0264-9993
• Language: English