Staff Working Paper No. 1,137
By Thomas W L Norman and Tim Willems
The fiscal theory of the price level (FTPL) posits that the price level adjusts to ensure the Government’s budget equation is met in equilibrium, but is silent on the exact adjustment mechanism. By modelling the Government as a large, satiable player in a game with households, we demonstrate that the FTPL’s outcome can be understood as a 'dividend equilibrium', achieved via price level driven revaluation of initial debt. It coincides with the Core (ensuring stability) and the unique outcome consistent with players receiving their Shapley Value. The price level adjustment envisioned by the FTPL thus emerges endogenously as the sole stable outcome when agents are compensated according to their marginal contributions, rather than it being imposed as an assumption. This provides a formal foundation for non-Ricardian fiscal policies, central to the FTPL.
This version was updated in October 2025.
A game-theoretic foundation for the fiscal theory of the price level
