Contact: Media Representative 612-204-5261 Date: December 27, 1999 FOR IMMEDIATE RELEASE

Fall 1999 Quarterly Review

The following articles appear in the Fall 1999 issue of the Quarterly Review.

Explaining the Fiscal Theory of the Price Level
by Narayana Kocherlakota and Christopher Phelan.

Many traditional macroeconomic models do not have determinate predictions for the path of inflation: even for a given specification of money supplies, many paths of inflation are consistent with equilibrium. According to the fiscal theory of the price level, fiscal policy can be used to select which of these many paths actually occur. This article explains the fiscal theory of the price level and discusses its empirical and policy implications. The article argues that the theory is equivalent to giving the government an ability to choose among equilibria.

Maintenance and Repair: Too Big to Ignore
by Ellen R. McGrattan and James A. Schmitz, Jr.

Most models of aggregate economic activity, like the standard neoclassical growth model, ignore the fact that equipment and structures are maintained and repaired. Once physical capital is purchased in these models, there are typically no more decisions made regarding its use. The theme of this article is that there is evidence to suggest that incorporating expenditures on the maintenance and repair of physical capital into models of aggregate economic activity will change the quantitative answers to some key questions that have been addressed with these models. This evidence is primarily from a little-used economy-wide survey in Canada. The survey shows that the activity of maintaining and repairing equipment and structures is an activity that is generally both large relative to investment and a substitute for investment to some extent—and to a large extent during some episodes.

The Quarterly Review is published by the Research Department of the Federal Reserve Bank of Minneapolis. Any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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