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.

About the Author
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
"Provocative . . . and well timed for an age of big deficits and high inflation." * The Economist *
"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
"Fiscal Theory of the Price Level . . . provides an elegant theoretical framework for both explaining the experiences of the 2010s and why the change in policy regime in the 2020s has led to high inflation and interest rates - and what will be required to return inflation to 'normal'."---Melissa Davies, Society of Professional Economists



Book Information
ISBN 9780691242248
Author John Cochrane
Format Hardback
Page Count 584
Imprint Princeton University Press
Publisher Princeton University Press