provided by Research Papers in Economics
DISTURBING THE FISCAL THEORY OF THE PRICE
LEVEL: CAN IT FIT THE EU-15? (*)
Antonio Afonso (**)
Department of Economics, Instituto Superior de Economia e Gestao,
Universidade Técnica de Lisboa,
R. Miguel Lupi, 20,
1249-078 Lisbon, Portugal
This version: January 2002
Abstract
With the fiscal theory of the price level (FTPL), Leeper-Sims-Woodford (LSW) argued
that the government budget constraint plays a key role in determining the price level.
Indeed, there could even be a dispute vis-à-vis the role of monetary policy in the
formation of the price level. Apart from several theoretical criticisms, also addressed in
the discussion given in this paper, the attempts to validate empirically the novel theory
are, so far, rather sparse. Therefore, one of the purposes of this paper is to tentatively
assess the possible empirical evidence, concerning the FTPL, for the EU-15 countries.
Keywords: Fiscal theory of the price level; fiscal policy; EU-15; panel data models
JEL classification: C23; E31; H63
(*) This paper was in some way inspired by the research conducted for the author’s Ph.D. thesis.
The author acknowledges comments from Jorge Santos. The usual disclaimer applies.
(**) Tel.: +351 21 392 2807; Fax: +351 21 396 6407; e-mail: [email protected]