By Willem H Buiter
In most macroeconomic models, the real equilibrium is determined in the long run by real factors such as the capital stock, the available labour force and technical progress. The nominal anchor, ie the determinant of the general price level, is usually provided by the money stock, a monetary policy rule, or the exchange rate regime. A recent literature has attempted to show that fiscal policy could provide the nominal anchor, and hence this approach is known as the fiscal theory of the price level (FTPL).
The fallacy of the fiscal theory of the price level, again