Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/109050
Authors: 
Fan, Jingwen
Minford, Patrick
Ou, Zhirong
Year of Publication: 
2014
Series/Report no.: 
Cardiff Economics Working Papers E2014/20
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. Fiscal policy has a substantial role in this weighted model. A similar model accounts for the 1980s though the role of fiscal policy gets smaller.
Subjects: 
UK Inflation
Fiscal Theory of the Price Level
Identification
Testing
Indirect inference
JEL: 
E31
E37
E62
E65
Document Type: 
Working Paper

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