the adequate price level is met, in order to validate the budget constraint. However, and
since it is not possible to know beforehand which is that price level, nothing will
prevent the government of deciding the indebtedness level and the primary balance that
it wishes to assume. If the government did behave like Buiter seems to be suggesting,
disregarding market restrictions, the level of public debt might rise without limit when,
in fact, the equilibrium price level is adjusted to prevent that such boundless increase of
government debt might occur.
Cushing (1999) argues that in a non-Ricardian regime, chacterized by an active fiscal
policy, the fiscal determination of the price level requires some rather implausible
assumptions. For instance, in order to determine the price level through the
intertemporal budget constraint, it is necessary for the consumers to believe that the
government will honour its debts, even when the stock of public debt rises to very high
levels. If there is a significant risk that those debts are not paid, the government may
have to change the way it conducts fiscal policy, to ensure that its intertemporal budget
constraint is not violated, since the alternative, a price level increase, would reduce the
real value of debt to be reimbursed to the public, that might not buy, in the future, new
government debt in the market. In these circumstances, the price level would not be
determined by the government budget constraint, instead, the price level ends up being a
restriction to which that constraint must obey. Cushing (1999), as well as McCallum
(1999a), criticise therefore the FTPL supposition of the transversality condition and the
hypothesis that the stock of public debt is on a convergence path. In a non-Ricardian
regime, neither the government nor the Central Bank are committed to ensure that
convergence process, however, the public is supposed to believe that the government
will not default in the future on its liabilities.
The essence of the FTPL, in its criticism of the quantitative theory of money, does not
seem to be to figure out if the quantitative equation of money links or not the price level
with the stock of money, but really to discuss if the stock of money and the price level
may be determined by fiscal policy. However, to distinguish between if the supply of
money and the interest rate are determined by fiscal policy or if the money supply and
interest rate are determined exogenously, it is not an easy point to assess only under
theoretical grounds.
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