The Fiscal Theory of the Price Level with Nominal Revenues and Expenditures

Orientador(a): Tiago Couto Berriel

Co-orientador(a): Carlos Viana de Carvalho

The usual assumption that fiscal policy is set in real terms is neither realistic nor innocuous. In this article, I propose a model that accounts for the existence of nominal revenues and expenditures. This creates an unexplored channel through which monetary and fiscal policies interact. I show that, in this environment, the price level can be fiscally determinate, even when all government debt is real. Also, the effects of monetary and fiscal policies are sensible to the degree of indexation in the government budget. For instance, a monetary policy tighten can cause a temporarily reduction of inflation, in the short-run. In order to gauge how relevant are these nominal components, using Bayesian techniques, I estimate the model for the US economy.

M392