A Continuous-Time Stochastic Model of the Fiscal Theory of the Price Level and Consistency of Its Critique

Abstract

The paper tests the validity of the critique of the fiscal theory of the price level. A stochastic general equilibrium model with continuous time is constructed. An active fiscal policy and a passive monetary policy have been set. Monetary policy manages the interest rate through the Taylor rule. The stochastic default factor in the special form is introduced. A complete definite system of equations is obtained for the detection of equilibrium. It is asserted that the peculiarities of the approach to modeling are of critical importance for verifying the presence of certain hypotheses and formulating conclusions. The results of this work are in support of the fiscal theory of the price level.