TESTING THE VALIDITY OF THE FISCAL THEORY OF THE PRICE LEVEL (FTPL): A REVIEW OF INTERNATIONAL LITERATURE
Keywords:
FTPL, Fiscal deficits, Fiscal and Monetary policy, InflationAbstract
The main objective of this paper is to review literature on the Fiscal Theory of the Price Level (FTPL) and its validity in price level determination for both developed and developing economies. FTPL may be understood on the categorisation of the fiscal regime into two types, namely, the Ricardian and non-Ricardian regimes. Empirical evidence for the validity of FTPL on price level determination depends on dominant characteristics of the policy regime. The Ricardian regime does not hold for FTPL, while the non-Ricardian regime holds for FTPL. Based on surveyed empirical studies, time series and panel analysis were used through various estimation methods in the validation of FTPL. Most of the findings from the studies reviewed in this paper validated the FTPL. This means that inflationary episodes tend to be influenced by fiscal dominant regimes. The study concludes that the conduct of fiscal policy influences price dynamics. Hence, fiscal variables should be taken into account by the central bank in its monetary policy rule.References
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