The fiscal theory of the price level – identification and testing for the UK in the 1970s

Fan, J. ORCID: 0000-0003-4447-6580, Minford, P. and Ou, Z., 2013. The fiscal theory of the price level – identification and testing for the UK in the 1970s. Working Paper. London: Centre for Economic Policy Research.

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Abstract

We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK in ation in the 1970s. We confront the identifcation problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identifed, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes.

Item Type: Working paper
Description: CEPR discussion paper 9763
Creators: Fan, J., Minford, P. and Ou, Z.
Publisher: Centre for Economic Policy Research
Place of Publication: London
Date: November 2013
Divisions: Schools > Nottingham Business School
Depositing User: Linda Sullivan
Date Added: 17 Feb 2017 16:16
Last Modified: 09 Jun 2017 14:12
URI: http://irep.ntu.ac.uk/id/eprint/30219

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