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Conventional economic thinking gives monetary policy the task of controlling inflation, while fiscal policy manages the public debt level. There are circumstances under which those conventional assignments work perfectly well. However, after years with interest rates near zero and inflation stuck below desired targets, monetary policy seems to have lost its power to stimulate the economy.

The times call for new thinking, and one promising idea is the fiscal theory of the price level (FTPL). After two decades of research, the theoretical controversies have been largely resolved. The next step is to understand how to put the theory to work–to apply it to understand historical episodes, data, policy, and policy regimes.

This conference was organized to address those questions and map out an ongoing research agenda for the fiscal theory of the price level. It brought together leading experts  who have contributed to the theory along with young scholars, skeptics, and economists from the Federal Reserve involved in monetary policy to discuss early-stage work and promising directions for further inquiry.

The fiscal (or real) theory of the price level suggests that traditional macroeconomic roles can be reversed, with monetary policy stabilizing debt and fiscal policy determining the price level. This insight has emerged by modeling fiscal behavior with the same attention to detail that monetary theory accords to monetary policy, according to conference co-organizer Eric Leeper of Indiana University,

The theory also suggests that you might need to raise, rather than lower interest rates to boost inflation. “Keeping interest rates extremely low to inflate economies isn’t going to help if you’re not running the right fiscal policy,” Leeper said. “This emphasizes that we have to be thinking about fiscal and monetary policy jointly.”

Coordinating monetary and fiscal policy is a significant challenge, noted Christopher Sims of Princeton University. In the US, partisan politics in the legislature is a barrier to such coordination. In the European Union, there is no central fiscal authority to coordinate policy. What’s more, effective fiscal and monetary policy are closely linked to individuals’ expectations of policy outcomes, particularly future inflation.. In his presentation, Sims addressed how to incorporate expectations into fiscal theory models.

Other presenters at the conference examined historical episodes where nations went off the gold standard, a form of fiscal commitment. Others looked at how the theory could be taken to data.

Conference co-organizer John H. Cochrane of Stanford suggested areas where more research would be useful, focusing on impulse responses and discount rate variation. Harald Uhlig, playing the skeptic, challenged assembled researchers to provide “the smoking gun” for the theory. Much the way Milton Friedman and Anna Schwartz provided the evidence that solidified Irving Fisher’s MV=PY quantity theory of money, Uhlig called for the graph or data or “facts that scream FTPL” as a way to convince policymakers of the theory’s value.

A video series from the conference explores the main idea of the fiscal theory, its current state, where more work needs to fill in gaps, how to implement it in policy, and what the conference aimed to accomplish.


Friday, April 1, 2016
Welcome and Introduction to the Conference
John H. Cochrane, Senior Fellow, Hoover Institution at Stanford University
Eric Leeper, Professor of Economics, Indiana University
A History of U.S. Debt Limits
George Hall, Brandeis University
Price Level Stability Across Monetary Regimes: Examples from the Long 18th C.
François Velde, Federal Reserve Bank of Chicago
Christophe Chamley, Boston University
Fiscal Monetary Interactions During the Classical Gold Standard and Wartime Suspension Periods
Michael Bordo, Rutgers University
Arunima Sinha, Fordham University
Hyperinflation in a Monetary Union: Lessons from 1619-1623
Martin Kliem, Deutsche Bundesbank
Fiscal Inflation in 1933
Margaret Jacobson, Indiana University
Eric Leeper, Professor of Economics, Indiana University
Fiscal and Monetary Coordination at the Zero Lower Bound
Christopher Sims, Princeton University
Conventional and Unconventional Monetary Policy and FTPL
Stephen Williamson, Federal Reserve Bank of St. Louis
Managing Long-Run Beliefs via Fiscal Policy
Narayana Kocherlakota, Lionel W. McKenzie Professor of Economics, University of Rochester
Monetary Policy and FTPL
John H. Cochrane, Senior Fellow, Hoover Institution at Stanford University
FTPL: A Skeptical View
Harald Uhlig, Bruce Allen and Barbara Ritzenthaler Professor in Economics and the College, the Kenneth C. Griffin Department of Economics
Confronting Theory with Data
Francesco Bianchi, Cornell University
Linking Data to Optimal Policy
Campbell Leith, University of Glasgow
The Fiscal Theory of the Exchange Rate: A Quantitative Assessment
Alexander Kriwoluzky, Universität Halle-Wittenberg
Monetary-Fiscal Interactions and the Euro Area's Malaise
Bartosz Maćkowiak, European Central Bank