Is China's Price Level Determined By Fiscal Policy?

The monetarist school believes that prices are determined by currency,and the idea of FTPL(the fiscal theory of price level)in the 1990s led people to reconsider the decision on price levels.FTPL believes that whether the price level is determined by currency or financial decision depends on the combination of fiscal policy and monetary policy.Under the combination of active monetary policy and passive fiscal policy,prices are determined by currency,and otherwise prices are determined by the fiscal policy.Therefore,whether the combination of monetary policy and fiscal policy is the Ricardian directly affecting the policy objectives and the effectiveness of the two.There is still controversy about whether the price is determined by fiscal policy in China.The assumption of the one-period bond makes the model under the non-Ricardo system excessively dependent on the current inflation as the absorber of the fiscal policy shock,which leads to excessive inflation fluctuations.The long-term bond assum ption can avoid this problem,thus improving the model fitting.At present,China s research on this issue conduct their research with the assumption of long-term bonds.This paper constructs a DSGE model based on the long-term bond hypothesis,combines the actual data of China from 1996 to 2017,and uses the Bayesian parameter estimation method to empirically study the decision of China s price level.The empirical results show that the long-term bond hypothesis can improve the model fitting,and the Chinese monetary and fiscal policy combination is consistent with the Ricardo system during the period of 1996-2017,regardless of the long-term bond or short-term bond assumptions.The operating space is still la rge,and it is not necessary to consider the impact on inflation when formulating the control strategy.Policy objectives for stabilizing inflation should be assigned to active monetary policy.