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Situated in the heart of Illinois farm country, Midwest City* provided the backdrop and the baseline for a qualitative research project considering the grand tour question, “What are the perceptions of the people of the Midwest concerning math and math education?’ The target population consisted of the people located and living in the community and school district of Midwest City, Illinois.
The paper provides a positive analysis of the link between inflation and fiscal policy, as presented in the “Fiscal Theory of the Price Level” (FTPL). The economics literature recognizes two links between fiscal policy and inflation, one due to inflationary finance, as exposited by Sargent and Wallace (1981), and the other due to the FTPL. The FTPL presents a new understanding of the role of fiscal policy in determining the price level and inflation, and is highly controversial and often misunderstood. Leeper (1991) presented the early ideas, Woodford (1995, 1997, 1998a, 1998b) and Sims (1994) formulated the ideas into the “Fiscal Theory of the Price Level,” and Kocherlakota and Phelan (1999) and Christiano and Fitzgerald (2000) provide clear, simple expositions of the theory. Cochrane (1999, 2000) argues for the plausibility of the theory and uses it to explain US data on real debt and inflation, Loyo (1998) explains Brazilian inflation, Bergin (2000) and Sims (1999) analyze EMU issues, Daniel (2001) explains exchange rate crises, and Sims (2002) considers its implications for dollarization. Even as some authors have used the theory to explain economic issues, others doubt both its theoretical and empirical validity. Niepelt (2002), Bassetto (2002), Buiter (1999), McCallum (2001), Weil (2002), and Dupor (2000) all provide theoretical critiques, while Bohn (1998) and Canzoneri, Cumby, and Diba (2001) have challenged its empirical Stated simply, the fiscal theory of the price level says that the price level must assure that the real value of nominal government debt equals the present value of expected future fiscal surpluses, assuring intertemporal government budget balance. Equivalently, the theory can be stated that the price level must equate a representative agent’s demand for consumption, satisfying his Euler equation and intertemporal budget constraint, with the available supply of consumption goods, in an economy in which government debt is net wealth for the agent (Woodford 1995, 1998b, Daniel 2001b). Another equivalent statement, based on asset-pricing, is that the price level must be determined such that the real value of government debt equals the present value of profits from government operation (budget surpluses) (Cochrane 2000). Regardless of how it is expressed, the theory applies only if the government does not assure inter temporal budget balance at each and every price sequence.
This paper provides an explicitly stochastic treatment of the FTPL. The stochastic presentation allows extension of the theory to accommodate recent criticisms, clarifies the roles for monetary and fiscal policy in determining inflation, and extends the range of cases for which the FTPL is likely to apply. This paper explicitly considers two criticisms, one by Niepelt (2002) in which he argues that the FTPL is irrelevant with zero initial debt, and a second by Weil (2002) in which he argues that uncertainty about whether the regime is Ricardian, even when it is non-Ricardian, invalidates the FTPL. Consideration of these two critiques modifies the necessary conditions for the FTPL in interesting ways, implying that the FTPL is more relevant than its critics, and perhaps even its advocates, suppose. Specifically, the analysis shows that when markets are incomplete, the FTPL applies in all periods.
