Foundations of the Fiscal Theory of Price Level
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Looking for a theory that would explain the price level and inflation processes, as an alternative to quantitative theory of money, more and more frequently attention is turned towards the fiscal theory of price level (FTPL). According to this concept the price level is defined by intertemporal budgetary constraints, while inflation itself is always regarded as a fiscal phenomenon. Adherents to FTPL assume that if the intertemporal budget constraint and the so called non-Ricardian fiscal policy are taken into account, then the level of prices is defined in a unique way. There are two orientations within the FTPL, the first one focuses on the definiteness of price level, while the second embraces issues revolving around recommendations for economic policy making. An important conclusion derived from FTPL states that even a fully independent central bank is not able to guarantee the stability of price level.
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