The Fiscal Theory Of The Price Level, And The Optimal Monetary Policy

"The Fiscal Theory of The Price Level"(FTPL) is the newest progress in the field of the optimal monetary policy theory, and it is a monetary theory of a new Keynesis doctrine. Contrary to monetary doctrine and new classical macroeconomics, FTPL shows that the price level is not determined by the monetary policy, but determined by the fiscal policy. It proves that the application of the Non-Ricardian regime in the policy is the main reason that the fiscal theory of the price level is bonded. It is the regime of the Non-Ricardian application that stresses the decisive action to the level of the prices of the fiscal policy, for the government can lighten its pressure of debt and deficit through the fluctuation of the market price, with breaking a contract in a disguised form.The article first carries on an overall retrospect to the traditional theory about the determination of the price level, then roughly comments on the different views on determination of the level of the prices from the monetary and the New Keynesis doctrine,. On this basis, further researches on the fiscal theory of the price level is carried on, and we analyzed how the level of prices is determined separately in the currency economic model, no-currency economic model, long-term interest rate model, and open economy model. Under the Non-Ricardian policy regime, the government pegs to the current value of the future surplus, externalizing tax (T) and expenditure (G), if the government deficit is financed by issuing bond, and then government budget can be cleared through the fluctuation of the market price. This process indicates that the bigger the government deficit is, the more debt the government have, then the higher the level of the prices will rise, it is easer to cause to the inflation.FTPL requires the optimal monetary policy to peg to the interest rate; the article studies what kind of interest rate feedback rule can realize stability of the price level and Pareto improvement of social welfare under the Ricardian regime and the Non-Ricardian regime separately. Under the Ricardian regime, only in case of imperfect competition and price rigidity, the optimal monetary policy rule is the associations of passive monetary policy and positive fiscal policy probably, requiring this feedback rule is contemporaneous or backward-looking, but for a forward-looking rule, the conclusion is not bonded, as so is in a flexible price model. Under the Non-Ricardian regime, the optimal policy is the association of the passive monetary policy and positive fiscal policy, and this conclusion is also established under the backward-looking and forward-looking interest rate rule. This article also sets up two stochastic models, indicating even in the uncertain cases, FTPL is bonded, too. But the conclusion of empirical analyses cannot support fiscal doctrine of the price level determination especially, so this is the weakest part of this theory, too.