English, Article, Journal or magazine article edition: Testing the FTPL across government tiers. Peter Claeys; Raúl Ramos; Jordi Suriñach

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Bookmark: http://trove.nla.gov.au/version/36068
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Testing the FTPL across government tiers.
Author
  • Peter Claeys
  • Raúl Ramos
  • Jordi Suriñach
Physical Description
  • preprint
Notes
  • Control on regional government budgets is important in a monetary union as lower tiers of government have fewer incentives to consolidate debt. According to the Fiscal Theory of the Price Level; unsustainable non-Ricardian fiscal policies eventually force monetary policy to adjust. Hence, uncoordinated and non-regulated regional fiscal policies would therefore threaten price stability for the monetary union as a whole. However, the union central bank is not without defense. A federal government that internalises the spillover effect of non-Ricardian fiscal policies on the price level can offset non-Ricardian regional fiscal policies. A federal government, which taxes and transfers resources between regions, may compensate for unsustainable regional fiscal policies so as to keep fiscal policy Ricardian on aggregate. Following Canzoneri et al. (2001), we test the validity of the Fiscal Theory of the Price Level for both federal and regional governments in Germany. We find evidence of a spillover effect of unsustainable policies on the price level for other Länder. However, the German federal government offsets this effect on the price level by running Ricardian policies. These results have implications for the regulation of fiscal policies in the EMU.
  • Sustainability, fiscal policy, FTPL, fiscal federalism.
  • RePEc:ira:wpaper:200812
Language
  • English
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