New "Fiscal theory of the price level" draft.

I posted a new draft of The fiscal theory of the price level, a slowly emerging book manuscript. It's heavily revised through Chapter 6.

Chapter 5 has a much better treatment of sticky price models. The mechanics of writing new-Keynesian + fiscal theory models are really easy. Invitation: there is a great paper-writing recipe in here! Chapter 6 includes empirical work, also ripe for extension. Both chapters summarize recent papers  A fiscal theory of monetary policy with partially repaid long term debt and The fiscal roots of inflation.

I've clarified and emphasized a point that's been floating around but not clearly enough: governments who borrow (deficits) do convince markets that they will subsequently repay debts (surpluses) at least in part. The surplus process has an s-shape, not an AR(1) shape. If governments do not do so, then they cannot raise revenue from bond sales, and they cannot finance deficits by selling debt.  The evident fact that they do both is some of the strongest evidence for an s-shaped surplus process. Much fiscal theory analysis, apparent rejections, and puzzles come down to ruling out this (with hindsight) simple fact, and also forgetting some lessons of 1980s time-series econometrics.

The book draft is up to solicit comments, which I welcome, best by private email. The links take you to a new website. I discourage browsing around for the moment as it is heavily under construction. I can't access my Booth website anymore, so a new one is coming but slowly.




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