then have to rise to ensure once more the fulfilment of the intertemporal government
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budget constraint.
4. Validation of the fiscal theory of the price level
Regarding the empirical validation of the FTPL, Cochrane (1999) doubts of the interest
of that validation, that is, of the interest in assessing empirically the suitability of a non-
Ricardian regime, since the causal relations between the several variables can never be
rejected/accepted without making use of additional assumptions, frequently stemming
from the hypothesis itself made about the fiscal regime that is tested. It seems however
that this is also true with the identity of the quantitative theory of money and the
resulting money demand functions.
For example, Woodford (1995) also contends that it does no make much sense to test in
empirical terms the FTPL. The line of reasoning provided is based on the idea that all
monetary regimes, monetary rules ourmoney demand specifications leave the price level
undetermined, and consequently the price level can only be determined by the fiscal
policy.13
The solution of trying to validate the FTPL through the inspection of budget deficits and
government debt, a possible empirical approach, is not easy since in a non-Ricardian
regime there is solely the guarantee that the government budget constraint is obeyed in
equilibrium (see Cochrane [1999] and Woodford [1998a]). This conviction is also
criticised by Buiter (1999) who says 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.”
The government budget constraint, equation (6), and the usual transversality condition,
equation (7), may give a suggestion on how to assess the adjustment process of the main
fiscal variables. A possible method would be to try to understand wether is the price
12 Kenc, Perraudin and Vitale (2000) mention this point.
13 Korcherlakota and Phelan (1999) are also sceptical as to the feasibility of the empirical validation
of the FTPL.
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