A comprehensive account of how government deficits and debt drive
inflation
Where do inflation and deflation ultimately come from? The fiscal theory
of the price level offers a simple answer: Prices adjust so that the
real value of government debt equals the present value of taxes less
spending. Inflation breaks out when people don't expect the government
to fully repay its debts. The fiscal theory is well suited to today's
economy: Financial innovation undermines money demand, and central banks
don't control the money supply or aggressively change interest rates,
invalidating classic theories, while large debts and deficits threaten
inflation and constrain monetary policy. This book presents a
comprehensive account of this important theory from one of its leading
developers and advocates.
John Cochrane aims to make fiscal theory useful as a conceptual
framework and modeling tool, and for analyzing history and policy. He
merges fiscal theory with standard models in which central banks set
interest rates, giving a novel account of monetary policy. He
generalizes the theory to explain data and make realistic predictions.
For example, inflation decreases in recessions despite deficits because
discount rates fall, raising the value of debt; specifying that
governments promise to partially repay debt avoids classic puzzles and
allows the theory to apply at all times, not just during periods of high
inflation. Cochrane offers an extensive rethinking of monetary doctrines
and institutions through the eyes of fiscal theory, and analyzes the era
of zero interest rates and post-pandemic inflation.
Filled with research by Cochrane and others, The Fiscal Theory of the
Price Level offers important new insights about fiscal and monetary
policy.
