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Most relevant book in our context. Strongly recommended! — Zafar Masud
‘The fiscal theory of the price level’ is the idea that government fiscal policy including debt and taxes present & future is primary determinant of the price level or inflation as opposed to the quantity theory of money
Zafar Masud’s Publications on Fiscal Policy
The economic challenges facing Pakistan today are daunting and the roadmap for enhancing wealth and prosperity for the 230+ million citizens needs to be fostered. While the resumption of the IMF program is critical for addressing our immediate financial needs, their standard prescriptions may only address our short-term challenges. What we need is a radical transformation in the way the economy is structured, the way policy is formulated and implemented, and the redistribution of wealth in a more equitable manner. That is the only way forward to escape from the boom & bust cycles that have plagued our economy over the last many decades. Read full article…
About The Fiscal Theory of the Price Level — By John H. Cochrane
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.
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