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The Fiscal Theory of the Price Level: identification and testing for the UK in the 1970s

Fan, Jingwen, Minford, Patrick and Ou, Zhirong 2013. The Fiscal Theory of the Price Level: identification and testing for the UK in the 1970s. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

We investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identified, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the Orthodox model outperforms the FTPL. But the best account of the period assumes that expectations were a probability-weighted combination of the two regimes.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 04 Jun 2017 08:26
URI: http://orca.cf.ac.uk/id/eprint/77998

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