The Fiscal Theory of the Price Level

John H. Cochrane

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Hardback

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English

Princeton University Press
26 April 2023

Economic theory & philosophy; Macroeconomics; Monetary economics

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.

By: John H. Cochrane
Imprint: Princeton University Press
Country of Publication: United States
Dimensions: Height: 254mm, Width: 178mm,
ISBN: 9780691242248
ISBN 10: 0691242240
Pages: 584
Publication Date: 26 April 2023
Audience: College/higher education , Professional and scholarly , Primary , Undergraduate
Format: Hardback
Publisher's Status: Active

John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution at Stanford University. He was previously a professor of finance at the University of Chicago Booth School of Business. His previous books include Asset Pricing (Princeton).

Reviews for The Fiscal Theory of the Price Level

"""Having given the magic money tree a good shake, governments are now grappling with inflation and swollen debts. A more sombre age calls for a more serious approach to economics. John Cochrane’s fiscal theory fits the bill.""---Edward Chancellor, Reuters ""The culmination of years of careful research. . . . [The Fiscal Theory of the Price Level] is not just about predicting the behaviour of the price level, but rather opens a whole new dimension for studying the political and redistributive implications of fiscal policy as expressed through the channel of monetary policy and inflation.""---Michael Ben-Gad, Economic Affairs"