Where the FTPL applies

The fiscal theory of the price level does not explain very much in the US.  Inflation often soars much higher during periods when the national debt is low and falling (the 1960s) and falls sharply when the deficit increases dramatically (the 1980s).  But the FTPL does explain the inflation dynamics of Argentina:

“The [peso] price action looks like a loss of confidence by foreign investors coupled with some form of “capitulation” by domestic investors,” he added. “Markets need to see a radical tightening in fiscal policy in order to stabilise the situation, and that includes cutting wage hikes in order to fight inflation.

There is also some data that sounds suspiciously NeoFisherian:

Argentina’s peso is again feeling the heat.

The currency has fallen to a new record low of 23 against the dollar after slumping 5 per cent in morning trade on Tuesday. . . .

The declines come despite massive intervention by the Argentine central bank, which hiked interest rates by an unprecedented 12.75 percentage points to 40 per cent in the space of just seven days last week.

As always, however, you need to keep in mind the correlation/causation distinction.  Most likely it’s the high inflation causing the high nominal interest rates, not vice versa.  (Or if you prefer, the budget deficits are causing both.)



15 Responses to “Where the FTPL applies”

  1. Gravatar of Iskander Iskander
    8. May 2018 at 10:42

    I don’t understand the disregard for the quantity theory and the love for the fiscal theory these days. The fiscal theory only works in some cases because the deficits lead to printing money.

    Maybe things are different (I don’t know enough) under a pure credit economy, but we are not there yet.

  2. Gravatar of ssumner ssumner
    8. May 2018 at 11:21

    Iskander, I attribute it to a mistaken tendency to take a “finance-view” of money. To treat money like a bond, rather than a commodity.

  3. Gravatar of Benjamin Cole Benjamin Cole
    8. May 2018 at 16:58

    OT, but I gotta stick it in:

    The Fed cites a “persistent shortage of labor” for limited West Coast housing starts.

    I wish I was making this up.


  4. Gravatar of Colin Docherty Colin Docherty
    8. May 2018 at 23:36

    Speaking of Developed, developing, and Argentina, thought you might like the chart of 2018 Japanese wage data:


    It’s Abenomics, stupid!

  5. Gravatar of dlr dlr
    9. May 2018 at 04:28

    Scott, you can never go wrong blaming fiscal policy for inflation in Argentina. But in this case there is also a clear, conventional central bank story. In December the BCRA reacted to inflation exceeding its target by raising its inflation target from 8-12% to 15%. A month later it unexpectedly lowered rates in the face of even higher inflation. This coincided with the ARS going from 17 to 20. Only recently as the Peso continued to weaken amid dollar strength did it panic and reverse course with a series of frenetic rate hikes.

    There hasn’t actually been any bad fiscal news in recent months. That doesn’t mean that Argentina’s price level doesn’t need a full fiscal-monetary story for a good description — it does. But the proximate cause here might be conventional monetary credibility.

  6. Gravatar of Steven Kopits Steven Kopits
    9. May 2018 at 08:07

    …monetized budget deficits are causing both…

  7. Gravatar of Matthew McOsker Matthew McOsker
    9. May 2018 at 10:30

    Important to note that since 2014-15 Argentina has increased issuance of US dollar denominated debt versus peso denominated The latter is often a recipe for problems.

  8. Gravatar of ssumner ssumner
    10. May 2018 at 20:26

    Colin, Thanks for that data.

    dlr, That sounds plausible.

    Matthew, Yes, it’s interesting that these countries rely so much on dollar denominated debt—I’m not sure why.

  9. Gravatar of TheManFromFairwinds TheManFromFairwinds
    11. May 2018 at 08:21

    @dlr Argentine here. The problem is not that the central bank raised it’s target from 12% to 15% (at the time expected inflation was about 19-20% so the 12% target was seen as impossible by pretty much everyone). Had the BCRA raised the target to 15% on it’s own accord because they thought they could hit that and gain more credibility everything would have been fine.

    The problem was that the target was raised by the executive arm and interest rates were lowered at the request of the executive so as to not impact growth. This was quite rightly seen as a loss of independence of the CB and commitment by the government to fight inflation. Instead infation expectations are now about 22-23%, which has spooked investors, and the resulting run-off has created concerns about the dollar increase translating to even higher inflation.

    The only good news here is that by allowing the CB to raise rates to 40% this was seen as giving it back some independence and to fight the run-off the government has committed to reducing the primary deficit from it’s target of 3.2% to 2.7% for this year.

  10. Gravatar of Charlie Charlie
    11. May 2018 at 09:37

    The Survey of Professional Forecasters was released today. The consensus (median and mean) was 5.0% NGDP growth. Only 4 out of 33 of the forecasters were below 4.6%.

    Just curious what you think? I just made a big buy at 46 betting on the professional forecasters, but who knows…

  11. Gravatar of ssumner ssumner
    11. May 2018 at 10:14

    Fairwinds, Thanks, that’s interesting.

    Charlie, Do you have a link? The link I saw only had RGDP growth forecasts. (at 2.8%)

  12. Gravatar of Charlie Charlie
    11. May 2018 at 21:07

    With each release they update the historical series. NGDP is here:


    More series here:

  13. Gravatar of ssumner ssumner
    11. May 2018 at 21:40

    Charlie, Thanks, but it would be nice if they presented the information is a summary form, I don’t want to spend an hour trying to interpret excel files that come with no explanation. I’ll take your word for the 5% figure.

    Personally, that seems a bit high.

  14. Gravatar of dlr dlr
    12. May 2018 at 13:35

    Fairwinds, thanks. I agree that it’s easy to imagine a different world where the BCRA raised its stated inflation target with the right communication and without the January rate drop such that it wasn’t interpreted as a fiscal/monetary policy loosening.

    I’m curious about how noticeable, if at all, the behavioral changes have been on the ground amid the recent hike in the LAF corridor to 40%?

  15. Gravatar of TheManFromFairwinds TheManFromFairwinds
    13. May 2018 at 04:18

    “I’m curious about how noticeable, if at all, the behavioral changes have been on the ground amid the recent hike in the LAF corridor to 40%?”

    It’s honestly too early to tell. There’s some talk about planning for construction projects being halted due to the high rates, but it’s hard to separate this from the dollar appreciation (since Argentina has a long history of inflation all the real estate prices are practically dollarized). Clearly if the rates remain this high it will impact business loans and the housing market.

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