This paper presents a prototype model for development of the “fiscal theory of the price level.” In this simple setting, the fiscal theory’s distinctiveness relies upon adoption of a bubble solution, rather than the rational-expectations fundamentals solution. The paper then shows that the...

Consider a rational expectations (RE) model that includes a relationship between variables x_t and z_t+1. To be considered structural and potentially useful as a guide to actual behavior, this model must specify whether x_t is influenced by the expectation at t of z_t+1 or, alternatively, that z_t+1...