The Fiscal Theory of Price Level with a Bubble

Markus Brunnermeier, Sebastian A. Merkel and Yuliy Sannikov

No 27116, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper incorporates a bubble term in the standard Fiscal Theory of the Price Level equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides two illustrative models with closed-form solutions in which the return on government bonds is below the economy’s growth rate. The government can “mine” the bubble by perpetually rolling over its debt. Despite the bubble, the price level remains determined provided government policy credibly promises primary surpluses off-equilibrium. Sufficient “fiscal space” ensures that the bubble term is attached to government bonds rather than other assets, like crypto assets. The analysis provides a new perspective on debt sustainability analysis.

JEL-codes: E44 E52 E63 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac and nep-mon
Note: AP EFG ME
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Citations: View citations in EconPapers (21)

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Related works:
Working Paper: The Fiscal Theory of the Price Level with a Bubble (2020)
Working Paper: The Fiscal Theory of the Price Level with a Bubble (2020)
Working Paper: The Fiscal Theory of the Price Level with a Bubble (2020)
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