Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data

The “fiscal theory of the price level” (FTPL; Woodford, 1995 and 2001) marks the revival of interest for fiscal policy, after the long blackout that followed the crisis of Keynesian economics. Among the causes of this revival, an important role was played by the dramatic drop in US public debt during the Clinton presidency. The reduced stock of bonds in the hands of households led researchers to re-investigate the relationship between consumption, the government intertemporal budget constraint, wealth effects and monetary policy. As we will argue below, the attempts to give empirical support to the FTPL – that had its theoretical precursors in the work of Leeper (1991) and Sims (1994) among others –, have been rather unsuccessful so far, so that its main merit lies in the fact that it brought back into the debate the interaction between fiscal and monetary policy and its effects on the level of activity and on prices (...).