The Fiscal Theory Of The Price Level And Empirical Study

Friedman believes that inflation is a kind of monetary phenomenon under any condition,but this judgment is suspected in theory and empirical analysis with the acceleration of finance innovation and the application of general-equilibrium theory on macroeconomics. On the other hand, the scale of treasury bonds in many other developed countries expands continually. For example, the average proportion of debt/GDP in the European Union is 70-80%, making these countries more worry about the stability of fiscal policy. Therefore, many economists have started to study the finance factors affecting the price level. And the development of the fiscal theory of the price level is to explain inflation with fiscal factors.According to the fiscal theory of the price level, fiscal policy can directly or indirectly affect prices or inflation. Thus, making a stable fiscal policy is important for stabilizing the price level. However, according to the traditional view of monetary theory, inflation is a monetary phenomenon. In the short term, the fiscal or supply impulsion may have a temporary impact on the price level. However, if no sustained growth in the money supply, it is impossible to result in the sustained growth in the price level alone; In the long term, since the price of rigid, viscous or delay will be fully adjusted, the changes in the price level is simply a manifestation of the monetary changes.China has been expanding the scale of treasury bonds since 1994, especially the implementation of the positive fiscal policy in recent years, which further expanded the scale of treasury bonds. In addition,there are several negative financial factors in China, For example, the expandability of the coverage of social security, the need of constructing a social security network and the problem of aging. So the funds gap will lead to further swell the budget deficit and government debt. All of this will demand of fiscal policy stability increasingly. On the other hand, China's economy is not only overheated, but also faced liquidity and production capacity surplus, insufficient domestic demand, inflation and many other issues. Therefore, confirming the factors determining the price level of China is useful to raise China's scientific policy-making, enhance their ability to control inflation and provide a theoretical and empirical support. So it has great theoretical and practical significance.In this paper, we review the framework about the theory of price level determined, as well as explain the main argumentation about the fiscal theory of price level. Meanwhile, we adopt the empirical method from Canzoneri (2001) and the structure model from Cochrane (1998) to analyze the fiscal data. In addition, taking into account the structural changes in China's economic development in the past 20 years, we use the regime switching model to analyze the effect of fiscal policy on price level.Based on the analysis, this paper's conclusions are summarized as follows:Firstly, the empirical results indicate that the possibility of our country's fiscal policy tending to Ricardian regime is larger, But it shows different situations in different times. In the 1980s, the fiscal policy switched between tending to non-Ricardian regime and Ricardian regime, and the possibility of the former is larger than later. It is not surprise to turn out this conclusion because of unopened price system and frequent change of monetary and fiscal policy. Our country's fiscal policy tended to Ricardian regime after 1990. There are several reasons. On one hand, China's government price controls are gradually liberalized. On the other hand, although our country continues to expand the scale of debt because of the positive fiscal policy, to the scale of China's GDP debt/GDP is still relatively small. So, fiscal policy has little constraints on monetary policy. In other words, the current period is the time when the impact of fiscal policy on the price level is the weakestSecondly, taking into account the liquidity and production capacity surplus, insufficient domestic demand, inflation and many other issues, macro-economic adjustment and control should be mainly based on monetary policy, accompanied with appropriately tight fiscal policy, and the focus of fiscal expenditure should be on social security, public services and rural areas. The reason is that monetary policy determine prices in Ricardian regime, monetary policy can control inflation and excess liquidity effectively. In addition, fiscal policy have little crowding-out effect because of the weak impact of fiscal policy on the price level. So it is not appropriate to adopt a proactive fiscal policy. Thirdly, although the empirical results show that China's inflation is mainly caused by the monetary factors since 1990, we couldn't make certain that future's reason will be the same, taking all kinds of adverse factors into account, such as the expandability of the coverage of social security and the problem of aging, the possibility of inflation caused by fiscal factors will increase greatly, Then, the establishment of strict fiscal rules, the introduction of fiscal criteria in developed countries are all the subjects that deserves careful study. For example, establish the golden rule of China's financial expenditure in order to avoid the deterioration of fiscal deficit, in addition, a financial sustainable rule should be established in order to avoid the proportion of debt to GDP out of control.