ESRI Discussion Paper Series No.35
A Survey on issues of the FTPL(Fiscal Theory of Price Level)

May, 2003
Masaaki Kawagoe
(Special Research Officer,Economic and Social Research Institute)
(Counselor,Director General for Economic and Fiscal Management)
Noriki Hirose
(Executive Policy Research Officer,Economic and Social Research Institute)

The full text is written in Japanese.


This paper surveys and reexamines Fiscal Theory of Price Level's (FTPL, hereafter) theoretical framework as well as empirical and policy implications. A simple theoretical model, which unifies various models and notations scattered in the literature, is presented and reexamined through changes in assumptions underlying the model. Manipulating the assumptions is quite useful to show usefulness and limits of FTPL, which are critically surveyed here. This paper is intended to be more comprehensive than other surveys like Christiano and Fitzgerald (2000) and Kimura (2002) in that this comprises empirical results and policy proposals.

FTPL's assertion that today's price level is determined through government's budget constraint could be obscure if assumptions such as monetary policy rule and maturity structure of government debt are altered. It remains to be seen whether Non-Recardian type fiscal policy, which is a critical assumption of FTPL argument, is actually adopted. This paper casts a doubt on validity of FTPL as a policy proposal to overcome Japan's liquidity trap by arguing that the current Japanese macro policies are, in fact, consistent with prescriptions given by FTPL. Hence, a question is "Why has not Japan escaped the trap?"

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