Abstract:

Conventional macroeconomic models often provide not many reason to suppose that fiscal policy is an important determinant of the price level determination. On the one hand, it is often argued that price level determination or inflation is purely a monetary phenomenon, on the other hand, the “Ricardian Equivalence” proposition implies that as far as consumers have rational expectations, fiscal policy should no effect upon aggregate demand, and hence no effect upon price level and inflation. However, “The Fiscal Theory of the Price Level (FTPL) or The New Theory of Price Determination” which is developed by Woodford (1994, 1995, 1996), Sims (1994, 1997) and Canzoneri vd., (2001a) argued that fiscal policy, especially budget deficits, have an importance for the price level determination at least money. According to The New Theory of Price Determination present value budget constraint  (PVBC) plays the key role and price level is determined by the present value budget constraint. In this situation, monetary authority do not has any control over price level without fiscal authority’s support.  

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