Tightrope walker balancing coins and banknotes on a wire.

Decoding Economic Stability: Can Fiscal Policy Tame Inflation?

Elliot Brynn in Business & Economy August 2025 • 4 min read.

"Explore the groundbreaking Fiscal Theory of the Price Level (FTPL) and its potential to revolutionize how we manage inflation and economic stability."

In today's economy, keeping prices stable is a top priority for governments worldwide. It's not just about setting targets; it's about ensuring our financial lives remain predictable and secure. But what's the best way to achieve this stability? Traditional thinking puts central banks in the driver's seat, controlling inflation through interest rates and money supply. However, a growing number of economists are exploring a broader approach, one that includes the power of fiscal policy.

Enter the Fiscal Theory of the Price Level (FTPL). This theory suggests that government spending and taxation policies—fiscal policy—play a crucial role in determining price levels and inflation. Unlike the conventional view that sees monetary policy as the primary tool, FTPL argues that fiscal decisions can significantly influence the stability of our economy. It opens up new questions: Can governments use fiscal tools to manage inflation? And how do these policies interact with the actions of central banks?

This article delves into the intriguing world of FTPL, breaking down its core concepts and exploring its potential impact. We'll examine the debates surrounding this theory, particularly the criticisms about its complexity and potential for instability. By understanding FTPL, we can gain a fresh perspective on the forces shaping our economy and the policies that can lead to greater financial security.

What is the Fiscal Theory of the Price Level (FTPL)?

Tightrope walker balancing coins and banknotes on a wire.

The Fiscal Theory of the Price Level (FTPL) offers a different lens through which to view how prices are set in an economy. Unlike traditional monetary theory, which emphasizes the central bank's control over inflation through interest rates and money supply, FTPL posits that government fiscal decisions—specifically, spending and taxation—are fundamental drivers of price levels.

At its heart, FTPL suggests that the real value of government debt is determined by the present value of future budget surpluses. This means that if the government is expected to run persistent deficits, the public must believe that these deficits will eventually be paid off through future taxes or spending cuts. If this belief erodes, and people no longer trust that the government will be able to meet its obligations, inflation can result.

Government Debt and Expectations: FTPL places significant emphasis on the role of government debt and how the public perceives its sustainability.
Fiscal Discipline: The theory implies that fiscal discipline is crucial for maintaining price stability. Without a credible commitment to future surpluses, inflation expectations can become unanchored.
Interaction with Monetary Policy: FTPL does not dismiss the importance of monetary policy but argues that fiscal policy sets the stage within which monetary policy operates.

To put it simply, imagine the government has a large credit card bill (debt). If people believe the government will eventually earn enough to pay off that bill (future surpluses), the value of the currency remains stable. But if people doubt the government's ability to pay, they lose confidence in the currency, and prices rise (inflation).

The Future of Economic Stability: A Balanced Approach

The Fiscal Theory of the Price Level offers a compelling, albeit complex, perspective on how our economy functions. It highlights the critical role of fiscal policy in maintaining price stability and challenges the conventional wisdom that places monetary policy solely in charge. As we move forward, a balanced approach that considers both fiscal and monetary tools will be essential for navigating the ever-changing economic landscape and securing a more stable financial future for everyone.

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Everything You Need To Know

What is the Fiscal Theory of the Price Level (FTPL) and how does it differ from traditional views on inflation?

The Fiscal Theory of the Price Level (FTPL) is an economic theory that suggests government spending and taxation policies (fiscal policy) play a crucial role in determining price levels and inflation. Unlike traditional views, which primarily focus on monetary policy (interest rates and money supply) controlled by central banks, FTPL argues that fiscal decisions are fundamental drivers. FTPL posits that the real value of government debt is determined by the present value of future budget surpluses. If the government is expected to run persistent deficits without a credible plan for future surpluses, the public's confidence in the currency can erode, leading to inflation.

How does the Fiscal Theory of the Price Level (FTPL) explain the relationship between government debt and inflation?

FTPL emphasizes the role of government debt and public expectations in determining inflation. It suggests that if the public believes the government can manage its debt and generate future budget surpluses (through taxes or spending cuts), the value of the currency remains stable. Conversely, if people doubt the government's ability to meet its financial obligations, they lose confidence in the currency, causing prices to rise. This means that fiscal discipline, or the credible commitment to future surpluses, is crucial for maintaining price stability under the FTPL framework.

What are the core concepts of the Fiscal Theory of the Price Level (FTPL) and how do they influence economic stability?

The core concepts of FTPL include the role of government debt, fiscal discipline, and the interaction between fiscal and monetary policies. FTPL places a significant emphasis on how the public perceives the sustainability of government debt. It suggests that fiscal discipline is critical for maintaining price stability; without a credible commitment to future surpluses, inflation expectations can become unanchored. Furthermore, FTPL suggests that while monetary policy is important, fiscal policy sets the stage for monetary policy's effectiveness. These concepts collectively highlight that a government's fiscal choices have a profound impact on the economy's stability, including its ability to control inflation and maintain a predictable financial environment.

What are the potential implications of adopting the Fiscal Theory of the Price Level (FTPL) for economic policy-making?

Adopting the Fiscal Theory of the Price Level (FTPL) has significant implications for economic policy-making. It suggests that governments should actively manage fiscal policy (spending and taxation) to influence price levels, not just rely on central bank actions. This could involve adjusting spending and tax policies to ensure credible commitments to future budget surpluses, especially when debt levels are high or inflation is a concern. It requires a balanced approach that considers both fiscal and monetary tools, recognizing that fiscal policy sets the stage for monetary policy. It also implies that fiscal discipline is crucial for maintaining price stability, making it essential for governments to prioritize long-term fiscal sustainability.

How does the Fiscal Theory of the Price Level (FTPL) challenge the conventional understanding of inflation management and what are the main debates surrounding it?

The Fiscal Theory of the Price Level (FTPL) challenges the conventional wisdom by suggesting that fiscal policy, not just monetary policy, plays a crucial role in inflation management. It posits that government spending and taxation decisions significantly influence price levels. This contrasts with traditional approaches that primarily rely on central banks and interest rate adjustments. The main debates surrounding FTPL involve its complexity and the potential for instability. Critics argue that it's more complex to implement, requiring a high level of coordination between fiscal and monetary authorities and a strong public belief in the government's ability to manage debt. Also, there are concerns about potential instability if the government's commitment to future surpluses is not credible, leading to unanchored inflation expectations.