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THE FISCAL THEORY OF THE PRICE LEVEL IN THE CONTEXT OF THE POLICY MIX

J. Stawska

Abstract

The economic authorities’ decisions not only influence the economy, but also induce interactions between economic authorities. The recent crisis has provided evidence that the fiscal policy significantly shapes the decisions of independent central banks responsible for ensuring price stability – the main objective of monetary policy. This mechanism, described by the fiscal theory of the price level, is not a new discovery, because it has been debated on since the 1990s. The fiscal theory of the price level holds that because a monetary policy alone cannot ensure the stability of prices it should be assisted by an appropriate fiscal policy. The economists’ interest in monetary and fiscal interactions has been additionally stimulated by the rising levels of public debt, particularly after the recent economic crisis, large fiscal packages, and large purchases of bonds by central banks. This article analyses the importance of the fiscal theory of the price level in the context of monetary and fiscal interactions. The research methods used to this end include a review of the scientific literature, the statistical processing of the data and statistical research methods. The research findings lead to a conclusion about the fiscal policy’s increasing role in policy mix. The analysis is original in that it emphasizes the importance of a proper fiscal policy and reveals its growing significance for economic processes.

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