The fiscal theory of the price level (FTPL) provides an update and revision of monetary theory to address puzzles raised by the failure of both the new Keynesian theory (commonly used by central bankers) and neoclassical monetarism (in particular, the quantity theory of money as interpreted by Milton Friedman and Anna Schwartz)—puzzles such as the low inflation that followed the sustained expansionary monetary policies post-2008. We aim to summarize and explain the FTPL as developed by Eric Leeper, John Cochrane, and others. The FTPL builds on neoclassical monetarism by observing that government liabilities—bonds, notes, bills, and currency—derive their value from the assets that back these liabilities. These assets are chiefly the present value of future tax revenues, minus government spending other than that part of spending used to service the liabilities themselves. This net “profit” of the government is called the primary surplus. This primary surplus can be expressed in real terms (a quantity of goods and services, rather than a money amount). The total real value of the bonds is thus the total real value of the assets backing the bonds: the present value of all future real primary surpluses (which we shorten to PVFS, present value of future surpluses). In a very important sense, the FTPL harkens back to commodity-based theories of money, except now the “commodity” is the real value of future surpluses earned by the government. We can then solve for the price level. It is simply the nominal value of the bonds (the face value or number of bonds issued) divided by the real value of the bonds (the PVFS). If the nominal value of the bonds is held constant and the underlying asset (PVFS) becomes less valuable, prices go up. If the PVFS becomes more valuable, prices go down. We thus calculate the value of “money” (including government liabilities of all maturities) the way one would calculate the value of any security: through discounted cash flow analysis. Note that this approach is consistent with the QTM because, if money is defined in the traditional way as currency and demand deposits and we now hold the PVFS (the backing of the money) constant, then the price level is proportional to the amount of money in circulation. The FTPL is a more complete theory, however, because (1) it incorporates all government liabilities, not traditional money alone, and (2) because it is forward-looking and dynamic rather than considering only conditions in the present.

It is not common for an entire scholarly literature to be based on a fallacy, that is, 'on faulty reasoning; misleading or unsound argument'. The 'fiscal theory of the price level', recently re-developed by Woodford, Cochrane, Sims and others, is an example of a fatally flawed research programme. The source of the fallacy is an economic misspecification. The proponents of the fiscal theory of the price level do not accept the fundamental proposition that the government's intertemporal budget constraint is a constraint on the government's instruments that must be satisfied for all admissible values of the economy-wide endogenous variables. Instead they require it to be satisfied only in equilibrium. This economic misspecification has implications for the mathematical or logical properties of the equilibria supported by models purporting to demonstrate the properties of the fiscal approach. These include: overdetermined (internally inconsistent) equilibria; anomalies like the apparent ability to price things that do not exist; the need for arbitrary restrictions on the exogenous and predetermined variables in the government's budget constraint; and anomalous behaviour of the equilibrium' price sequences, including behaviour that will ultimately violate physical resource constraints. The issue is of more than academic interest. Policy conclusions could be drawn from the fiscal theory of the price level that would be harmful if they influenced the actual behaviour of the fiscal and monetary authorities. The fiscal theory of the price level implies that a government could exogenously fix its real spending, revenue and seigniorage plans, and that the general price level would adjust the real value of its contractual nominal debt obligations so as to ensure government solvency. When reality dawns, the result could be painful fiscal tightening, government default, or unplanned recourse to the inflation tax.

"Inflation, in which all prices and wages in an economy rise, is mysterious. If a war breaks out in the Middle East, and the price of oil goes up, the mechanism is no great mystery-supply and demand often work pretty visibly. But if you ask the grocer why the price of bread is higher, he or she will blame the wholesaler, who will blame the baker, who will blame the wheat supplier, and so on. Perhaps the ultimate cause is a government printing more money, but there is really no way to know this for certain but to sit down in an office with statistics, armed with some decent economic theory. But current economic theory doesn't really explain why we haven't seen inflation for so long, and more and more economists think that current theory doesn't hold together, or provide much guidance for how central banks should behave if inflation does break out. Many also worry that central banks have much less power over the economy than they think they do, and much less understanding of the mechanism behind what power they do have. The Fiscal Theory of the Price Level is a comprehensive new approach to monetary policy. Economist John Cochrane argues that money has value because the government accepts it for tax payments. This insight, he argues, leads to a deep re-reading of monetary policy and institutions. Inflation comes when a government is unable to repay its debts, rather than from mismanagement of the split of debt between money and bonds. In the book, he will analyze institutional design, historical episodes, and compare fiscal theory to the Keynesian and new-Keynesian theory based on interest rate targets, and to monetarism. The book offers an overview and introduction to the range of contemporary monetary economics and history of thought as well as the fiscal theory"--

A major, new, and comprehensive look at six decades of macroeconomic policies across the region What went wrong with the economic development of Latin America over the past half-century? Along with periods of poor economic performance, the region’s countries have been plagued by a wide variety of economic crises. This major new work brings together dozens of leading economists to explore the economic performance of the ten largest countries in South America and of Mexico. Together they advance the fundamental hypothesis that, despite different manifestations, these crises all have been the result of poorly designed or poorly implemented fiscal and monetary policies. Each country is treated in its own section of the book, with a lead chapter presenting a comprehensive database of the country’s fiscal, monetary, and economic data from 1960 to 2017. The chapters are drawn from one-day academic conferences—hosted in all but one case, in the focus country—with participants including noted economists and former leading policy makers. Cowritten with Nobel Prize winner Thomas J. Sargent, the editors’ introduction provides a conceptual framework for analyzing fiscal and monetary policy in countries around the world, particularly those less developed. A final chapter draws conclusions and suggests directions for further research. A vital resource for advanced undergraduate and graduate students of economics and for economic researchers and policy makers, A Monetary and Fiscal History of Latin America, 1960–2017 goes further than any book in stressing both the singularities and the similarities of the economic histories of Latin America’s largest countries. Contributors: Mark Aguiar, Princeton U; Fernando Alvarez, U of Chicago; Manuel Amador, U of Minnesota; Joao Ayres, Inter-American Development Bank; Saki Bigio, UCLA; Luigi Bocola, Stanford U; Francisco J. Buera, Washington U, St. Louis; Guillermo Calvo, Columbia U; Rodrigo Caputo, U of Santiago; Roberto Chang, Rutgers U; Carlos Javier Charotti, Central Bank of Paraguay; Simón Cueva, TNK Economics; Julián P. Díaz, Loyola U Chicago; Sebastian Edwards, UCLA; Carlos Esquivel, Rutgers U; Eduardo Fernández Arias, Peking U; Carlos Fernández Valdovinos (former Central Bank of Paraguay); Arturo José Galindo, Banco de la República, Colombia; Márcio Garcia, PUC-Rio; Felipe González Soley, U of Southampton; Diogo Guillen, PUC-Rio; Lars Peter Hansen, U of Chicago; Patrick Kehoe, Stanford U; Carlos Gustavo Machicado Salas, Bolivian Catholic U; Joaquín Marandino, U Torcuato Di Tella; Alberto Martin, U Pompeu Fabra; Cesar Martinelli, George Mason U; Felipe Meza, Instituto Tecnológico Autónomo de México; Pablo Andrés Neumeyer, U Torcuato Di Tella; Gabriel Oddone, U de la República; Daniel Osorio, Banco de la República; José Peres Cajías, U of Barcelona; David Perez-Reyna, U de los Andes; Fabrizio Perri, Minneapolis Fed; Andrew Powell, Inter-American Development Bank; Diego Restuccia, U of Toronto; Diego Saravia, U de los Andes; Thomas J. Sargent, New York U; José A. Scheinkman, Columbia U; Teresa Ter-Minassian (formerly IMF); Marco Vega, Pontificia U Católica del Perú; Carlos Végh, Johns Hopkins U; François R. Velde, Chicago Fed; Alejandro Werner, IMF.

High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or belowmarket real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative 1⁄2 of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

An overview of recent theoretical and policy-related developments in monetary economics.