







































 
 

 

29 
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Economy 
Vol. 10, No. 1, 29-38, 2023 

ISSN(E) 2313-8181/ ISSN(P) 2518-0118 
DOI: 10.20448/economy.v10i1.5118 

© 2023 by the authors; licensee Asian Online Journal Publishing Group 

 
 

 
 
 
The fiscal theory of the price level: The case of Morocco 

 
Jamal Agouram1   

Jamaa Anoualigh2   
Ahmed Ait Bari3   

Mustapha Amzil4   

 
 

( Corresponding Author) 
 
1,2Faculty of Economics and Management Guelmim, University IBN ZOHR, Morocco. 
1Email: jamal.agouram@edu.uiz.ac.ma  
2Email: j.anoualigh@uiz.ac.ma  
3,4Faculty of Legal, Economic and Social Sciences Agadir, University IBN ZOHR, Morocco. 
3Email: a.aitbari@uiz.ac.ma  
4Email: mustapha.amzil@edu.uiz.ac.ma  

 
Abstract 

In this paper, we will use the econometric model and the price-level fiscal theory (PLFT), which 
looks at how the government surplus, debt, and inflation interact to apply a vector autoregression 
(VAR) model to the Moroccan economy. We first want to figure out how fiscal and monetary 
policy shocks affect the economy. The second thing we want to do is study how fiscal and 
monetary policy affects each other. So, the theoretical limits we used to determine our model are 
based on an FTPL framework. The general price level budget and Keynesian theories are not 
entirely wrong because of what we found. Also, the fact that most of the variation in inflation can 
be explained by changes in the money supply suggests that monetary policy works well in the 
Moroccan economy to control inflation. However, debt policy has little effect on this control. The 
government is worried about the level of public debt in Morocco because it positively  affects the 
economy. Also, the positive effects over time should give the government confidence that the debt 
policy is working. So, debt dynamics still need to be a reason to worry because they would help 
the economy overall. Because it has a negligible effect on the economy immediately and lowers 
inflation, the government should pay less attention to the amount of debt and how quickly it 
grows. 

 
Keywords: Deb, Fiscal theory, Inflation, Monetary policy, Moroccan economy, Price-level. 

JEL Classification: C13; E00; E62.   
 
Citation | Agouram, J., Anoualigh, J., Bari, A. A., & Amzil, M. 
(2023). The fiscal theory of the price level: The case of 
Morocco. Economy, 10(1), 29–38. 10.20448/economy.v10i1.5118 
History:  
Received: 12 July 2023 
Revised: 20 September 2023 
Accepted: 25 October 2023 
Published: 7 November 2023  
Licensed: This work is licensed under a Creative Commons 

Attribution 4.0 License  
Publisher: Asian Online Journal Publishing Group 
 

Funding: This study received no specific financial support.    
Institutional Review Board Statement: Not applicable. 
Transparency: The authors confirm that the manuscript is an honest, 
accurate, and transparent account of the study; that no vital features of the  
study have been omitted; and that any discrepancies from the study as planned 
have been explained. This study followed all ethical practices during writing. 
Data Availability Statement: The corresponding author may provide stu dy 
data upon reasonable request. 
Competing Interests: The authors declare that they have no competing 
interests. 
Authors’ Contributions: All authors contributed equally to the c oncept ion 
and design of the study. All authors have read and agreed to the  p ub l ished 
version of the manuscript. 

 
Contents 
1. Introduction ................................................................................................................................................................................................... 30 
2. Literature Review......................................................................................................................................................................................... 30 
3. Theoretical Foundation.............................................................................................................................................................................. 31 
4. Empirical Evidence ...................................................................................................................................................................................... 32 
5. Discussion ....................................................................................................................................................................................................... 37 
References ........................................................................................................................................................................................................... 38 
 

 
 

 

 

mailto:jamal.agouram@edu.uiz.ac.ma
mailto:j.anoualigh@uiz.ac.ma
mailto:a.aitbari@uiz.ac.ma
mailto:mustapha.amzil@edu.uiz.ac.ma
https://creativecommons.org/licenses/by/4.0/
https://creativecommons.org/licenses/by/4.0/
https://www.doi.org/10.20448/economy.v10i1.5118
https://orcid.org/0000-0002-1574-1464
https://orcid.org/0009-0009-7386-6626
https://orcid.org/0009-0007-9875-1775


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Contribution of this paper to the literature 
The theoretical efforts made to mobilize the key concepts of our work, namely monetary policy 
and fiscal policy, and their effects on the Moroccan economy. 

 
1. Introduction 

Many central banks, including the central bank of Morocco, battle mightily to keep inflation in check (Bank 
AlMaghrib). To complete this equally massive task, describing inflation is a requirement. Theoreticians place a 
strong emphasis on fiscal policy and hold that sound monetary policy is a necessary but insufficient precondition 
for managing inflation. For this reason, independent of the actions taken by the monetary authorities in pursuit of 
their inflation-targeting strategy, fiscal policy may be the action that establishes the level of prices in general. As a 
result, maintaining a level of prices that is steady and low in inflation has remained the core goal of macroeconomic 
management in many economies, including Morocco. Among the many factors that contribute to inflationary 
tendencies in an economy, including monetary shocks, structural shocks, demand shocks, external shocks, and 
demographic changes, government fiscal policy measures are also linked to the consumer price index. This topic is 
important because of the COVID-19 environment, which forces governments to take on debt to stimulate economic 
growth (Fiedler, Gern, & Stolzenburg, 2020; Urquhart, 2022).  

The theoretical literature on the impact of fiscal policy on inflation was extensive throughout the 1990s. The 
writings of Leeper (1991); Sims (1994); Woodford (1994); Woodford (1995); Woodford (1996); Woodford (2001); 
Cochrane (1998) and Cochrane (2000) serve as the cornerstones of this idea. The traditional approach held that 
fiscal authorities would adjust primary surpluses to ensure government solvency at whatever price level and that 
the monetary aggregate was the only factor that determined the price level. Contrarily, FTPL argues that price 
level effects from fiscal shocks are plausible if fiscal policy can set primary surpluses independent of governmental 
debt. It looks at the possibility that fiscal policy could provide primary surpluses regardless of the total amount of 
state debt. To always respect the government's intertemporal budget restriction, the price level will adjust. These 
two categories of fiscal policy activity are referred to as non-Ricardian and Ricardian by Woodford (1995). 
Ricardian fiscal policy is appropriate when primary surpluses cannot be determined independently of public debt; 
non-Ricardian fiscal policy is appropriate when this is not the case. To promote macroeconomic stability and long-
term economic growth, fiscal and monetary policy works together. However, the connection between the two 
initiatives might have an impact on macroeconomic metrics, particularly inflation. 

However, Sargent and Wallace (1981) contend that monetary and fiscal policies cannot be incompatible in an 
economy. The coordination and application of monetary and fiscal policy determines how well the monetary 
authority controls inflation. Because of this, Leeper (1991) concentrated on two reliable institutions of policy: 
passive fiscal policy and active monetary policy, or the opposite. The monetary and fiscal supremacy systems 
described by Sargent and Wallace (1981) are comparable to these stable organizations. 

Leeper (1991) argues that monetary authorities maintain control over inflation rates in the long run but lose 
control over overall price levels in the short run. Sargent and Wallace (1981) show that avoiding low inflation in 
the near run results in high inflation in the long run. To enhance the welfare of economic agents, monetary and 
fiscal policy must be integrated and coordinated immediately.  

In this essay, we pose the question: To what extent does a state's price level get determined by its tax theory of 
inflation?  

This project will be broken into the following sections moving forward: The first section's goal is to define the 
basic theoretical tenets of the fiscal theory of price level and public debt. The method used in the empirical inquiry 
will be covered in the second section. This data will be analyzed, and the results of the empirical study will be 
presented in the third part.  

 
2. Literature Review 

The classical form asserts that inflation is always and everywhere a monetary occurrence, while the more 
recent FTPL describes how inflation occurs. Both are based on Friedman's quantitative theory of money (QTM), 
which was published in Friedman (1963). The traditional theory holds that fiscal policy is inactive, agents behave 
in a Ricardian framework, and the requirement for liquidity has the greatest impact on the level of prices. 
Therefore, early 1980s research on the causes of inflation prioritized monetary policy while disregarding fiscal 
policy, which is theoretically just as crucial in accomplishing the same goal. The majority of these studies are 
predicated on the notion that the monetary authority ought to have complete control. Prices could increase as a 
result of this. 

In contrast, a new school of thinking started to take shape in the 1990s. It claims that agents can act in non -
Ricardian ways. When this happens, fiscal policy takes action and no longer has to alter its primary surplus to 
maintain sound public finances. Because the monetary authority must permit inflation to occur to maintain a 
balanced budget, inflation is a fiscal problem. However, the (relatively recent) fiscal theory of the price level (hence 
referred to as FTPL) contradicts the monetarist perspective. 

There are important policy repercussions to the contrast between Ricardian and non-Ricardian regimes. Under 
the Ricardian system, sound monetary policy is both a necessary and sufficient condition for low inflation. The 
fiscal authorities should be forced to conduct a responsible and suitable fiscal policy as a result of an independent 
central bank with a strong institutional commitment to price stability. Under a non-Ricardian regime, sound 
monetary policy alone won't guarantee low inflation unless further steps are taken to limit the fiscal authority's 
latitude. 

According to some experts, the combination of monetary and fiscal policy is the most effective method to 
stabilize the economy. For instance, Sargent and Wallace (1981) discuss this topic in their foundational work on 
unpleasant monetarist arithmetic. They highlight the challenges that arise when an economy's fiscal and monetary 
policies are not coordinated. In fact, the coordination and application of monetary and fiscal policies are essential to 
the regulation of inflation by monetary authorities. However, Samizafy (2013) and Huart (2013) contend that using 
debt to finance public deficits has less of a distorting effect than using seigniorage under inflationary pressures or 



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raising mandatory levies under conditions of declining household purchasing power and declining firm financing 
capacity. Despite the advantages of borrowing over seigniorage or tax increases, some academics, like Sargent and 
Wallace (1981), contend that borrowing would be bad for economic growth and the level of prices in general. 
Panizza and Presbitero (2012) state that these effects could be either short-lived or long-lasting. 

As a result, it is important to understand the notions of dominant fiscal policy and dominant monetary policy 
developed by Sargent and Wallace (1981) to comprehend the actions of the two monetary and fiscal authorities. 
When monetary policy determines fiscal policy, regardless of what the fiscal authority requests, the monetary 
authority sets its aim for money supply expansion for the current and future periods. The amount of government 
credit that will be financed through seigniorage is therefore specified by the monetary authority. The fiscal 
authority's budget must be designed so that seigniorage and the sale of Treasury bonds can both be used to close 
budget gaps. 

On the other hand, when the government creates its budget without assistance from the monetary authority , 
fiscal policy is in charge. This enables the government to discuss deficits and surpluses both now and in the future. 
Because the monetary authority must attempt to cover any deficit between the supply and sales of Treasury notes 
by seigniorage, the supply of Treasury bills is a constraint in this case. This type of monetary authority can still 
manage inflation, but it is less effective than it would be in a coordinated system where monetary policy is the 
primary concern. If the fiscal authority sells just Treasury bills, it might not be able to close the deficit. The 
monetary authority will therefore have to print more money and put up with more inflation in order to. 

According to the fiscal theory of price level, a state's fiscal authority primarily affects the level of prices in its 
economy (Urquhart, 2022). The fiscal and monetary authorities are the two parties who, in theory, are in charge of 
this. But according to the fiscal theory of price level, this second actor will either have no part in making this 
decision or a minor one (Buiter & Sibert, 2017). Sadly, this theory is challenging to put into practice since the 
monetary authority will always have a significant influence and because it will be difficult to persuade the fiscal 
authority to pursue the appropriate course of action (Christiano & Fitzgerald, 2000). The price level's ambiguity 
and volatility will therefore work in your favor. 

In the fiscal theory of price level, government debt is a key component, and how it is managed will affect price 
level. People who believe in this theory anticipate this, which is bad news for monetarists who wish to employ 
money management to stabilize the economy. The government budget depends on the idea of intertemporal. The 
budget is intended to be intertemporal in that it can, in the context of the government's contractual obligations, 
span several years. 

The central bank, which oversees monetary policy, may intervene to provide stability or greater control over 
how prices are determined on the market. One of the numerous variables that must be taken into account while 
regulating the price level is taxes. This is one of the concerns with the fiscal theory of price level, thus monetary 
considerations must also be made (Buiter, 2002). We shall discuss interest rates, fiat money (the absence of which 
could support the fiscal theory of the price level), and monetary injections (such as the helicopter money created by 
the US Federal Reserve (Cochrane, 2021)), which are all related to these monetary issues. If prices stay where 
consumers think they should be and the government is to remain solvent, these items need to change or be 
coordinated with fiscal policy. 

 
3. Theoretical Foundation  

The fiscal theory of the price level has been the subject of substantial investigation and dispute among 
economists. Sargent and Wallace's fiscal dominance system, formulated in 1981, exemplifies this theory within a 
fixed monetary policy framework. However, it was only in the 1990s that Leeper, Sims, and Woodford provided 
alternative perspectives that challenged the mainstream interpretation of fiscal dominance. These economists 
established the potential of fiscal policy control without relying on monetizing public spending or seigniorage. 
Their contributions included notions such as Ricardian non-equivalence and central bank neutrality. 

Leeper (1991) extended the nature of monetary and fiscal limits, indicating that they can exhibit either an 
active or passive character. Active regulation happens when an authority managing government debt may modify 
variables depending on its assumptions, effectively regulating fiscal policy. In contrast, the passive influence of 
government debt on the authorities can be noticed, as government activity tends to be driven by private sector 
optimization. Consequently, the fiscal authority complies with the norms defined by the monetary authority, giving 
rise to what some consider a flawed fiscal theory of the price level. In this perspective, the central bank is regarded 
as a powerful and active authority, not bound by budgetary restrictions, capable of responding to past, present, and 
predicted future circumstances. However, the necessity of collecting adequate tax income to balance the budget 
arises due to the limits imposed by consumer optimization and the active authorities. Consequently, the decision -
making process of the passive authority is influenced by the prevalent present and historical variables linked to 
public debt. 

Contrary to the opinions, McCallum (2000) questions the assumption made by certain researchers that changes 
in the money supply have no impact on the price level and argues for addressing the monetary component 
alongside fiscal policy. According to McCallum, the weak fiscal theory of the price level, which allocates greater 
power to the government than the central bank, justifies skepticism. Consequently, as usually understood, the fiscal 
theory of the price level is questioned. While accepting the soundness of the fiscal component of the theory, 
McCallum emphasizes the need to integrate the monetary component into the study. 

Woodford (1998) extends the rationale underpinning the link between monetary and fiscal policy beyond the 
widely advocated yet undesirable alternative of relying on seigniorage as a source of government revenue. In 
investigating non-Ricardian fiscal policy, Woodford explores the wealth effect of higher government debt on the 
price level. These effects are consistent with rational expectations and frictionless financial markets, contradicting 
the premise of Ricardian equivalence. Woodford's methodology considers government debt maturity, indexation, 
and size differences. Moreover, Woodford criticizes the concept that a government cannot refuse to change its 
budget when debt reaches unsustainable levels and argues against the idea that the budget completely decides the 
price level within a model with several rational expectation equilibria. The inquiry also explores the consequences 



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of government debt on the price level under the assumption of adaptive, rather than rational, lifetime budget 
expectations. Finally, Woodford analyzes Ramsey's dynamic taxation in an optimal fiscal and monetary policy 
context. A non-Ricardian fiscal strategy is offered, wherein government purchases do not raise the present value of 
future tax receipts, leading to varied government bond equilibrium values. This policy regime can assure price 
stability when accompanied by appropriate monetary policy and government debt composition. 

Carlstrom and Fuerst (2000) take a different approach, claiming that the central bank, rather than tax rul es, 
holds power over the price level. This claim opposes the fiscal theory of the price level, which posits that tax rules 
determine price levels. Christiano and Fitzgerald (2000) define price stability as the notion that sustaining stable 
prices is a concern across all public policy domains. Cochrane (2001) analyzes the link between tax theory and stock 
market outcomes, considering Microsoft stock as a form of assessment. He proposes that if the future worth of a 
share of Microsoft stock is known in advance, such a method could provide more precise market price measures. 
Cochrane offers the concept of a price-level tax that could allow for economic functioning without dependency on 
fiat money. This strategy may also enable the government to satisfy its financial obligations over a longer 
intertemporal period, thereby testing the equilibrium restriction in a Ricardian economy. Creel and Sterdyniak 
(2001) emphasize that the fiscal or budgetary theory of the price level is primarily a theoretical construct, lacks 
empirical support, and has not exerted a substantial impact in evaluating its truth. 

Buiter (2002) critically evaluates the fiscal theory of the price level, arguing against the premise that the 
government's intertemporal budget constraint must be anchored in identity. According to Buiter (2017), this 
author considers the fiscal theory of the price level as dead. 

McCallum (2003) believes that the overall level of price determination is essentially governed by the fiscal 
policies of a specific state, with monetary phenomena relegated to a secondary role. The author concludes that the  
tax theory of the price level, which appears to be dominant in the contemporary economic landscape, can lead to 
confusion. McCallum criticizes the weak fiscal theory of the price level, which believes that the fiscal authority 
deceives financial authorities, and highlights his disagreement with this theory. Consequently, when presented with 
a choice between several rational expectations responses to a given model, the analyst's preference for a bubble 
solution involving increased asset values over an orthodox reaction entailing a rise in the quantity of money 
separates the fiscal theory. 

McCallum (2006) offers a different critique of the tax theory of the price level, criticizing it as harsh and 
unusual. This approach forecasts a price level that greatly deviates from the nominal money supply and is largely 
affected by bond stocks. 

Bassetto (2008) investigates the fiscal theory of inflation, emphasizing the significance of public debt, present 
and future budgetary plans, and spending in determining the price level without direct reference to monetary 
policy, which, in turn, indirectly affects the price level. 

Bajo-Rubio, Díaz-Roldán, and Esteve (2009) believe that monetary and fiscal policies have always influenced 
the price level. According to their interpretation, in the Ricardian framework, the monetary authority performs an 
active role, while the fiscal authority acts passively, responding to the activities of the tax authorities. Despite their 
legal independence, these two authorities are organically interconnected and work together continuously. 

Buiter and Sibert (2017) suggest that the fiscal theory of the price level combines fiscal restriction with the 
demand for a balanced budget, offering substantial obstacles. Nonetheless, the authors indicate a continuous 
interest in the fiscal theory of the price level and advocate the introduction of flexible or dynamic price models 
within the framework of general monetary equilibrium with rigid nominal prices. These suggestions revive the 
concept of the fiscal price level. The authors also caution against potential disasters that may arise if policymakers 
mistakenly perceive price-level fiscal theory as the optimal approach for analyzing the effects of monetary and fiscal 
policies on inflation, aggregate demand, real economic activity, and the possibility of government default. Ignoring 
the contractual responsibilities of the government could result in increased costs, force adjustments to the budget, 
and generate other unfavorable repercussions. 

Cochrane (2001) says that the budgetary theory of the price level opposes the government's fiscal authority 
against the central bank's monetary authority. These two entities must unite to address public debt and inflation. 
However, the divergent expectations and practices of the fiscal and monetary authorities render the budgetary 
theory of the price level ultimately absurd. 

Managing budgetary restrictions demands the adoption of fiscal initiatives by the government. The central 
bank observes These budgetary initiatives, which operate passively but retain a heightened awareness of 
government actions. The government may also adjust its fiscal policies in reaction to the active operations of the 
central bank. While these exchanges occur, it remains the role of the fiscal authorities to regulate debt levels and 
decide pricing levels. 

The intertemporal character of the government's budget allows for spreading debts, particularly long-term 
loans, based on different possibilities encompassing the fiscal theory of the price level and Ricardian equivalence 
theory. However, such a method carries the danger of inflation and may destabilize the desired equilibrium. The 
non-Ricardian fiscal theory of the price level reduces the degree of freedom in this regard, allowing the central 
bank the authority to adjust interest rates. 

Understanding that the fiscal theory of the price level and monetary policy can vary between governments is 
vital. In hyperinflation, typified by extreme price increases, fiscal and/or monetary actions are required to ca lm the 
situation due to the instability in the value of money. 

 

4. Empirical Evidence 
Most researchers investigating debt's effects on economic growth are neither classicists nor Keynesians but lie 

somewhere in between. The non-linear approach to the relationship between debt and economic development 
argues that debt positively affects economic growth up to a certain point, then becomes negative.  

Bohn (1998) and Canzoneri, Cumby, and Diba (2001) were the first to test the general theory of price-level 
budgeting in the real world. Using data from 1916 to 1995 and a method called linear regression, Bohn (1998) 
shows that the U.S. government altered its primary balance to reflect historical levels of debt in order to keep its 
finances stable. From 1916 to 1995, the monetary regime governed the U.S. economy. Canzoneri et al. (2001) 



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estimate the VAR for 1951–1995 U.S. data and find short-run evidence for the Ricardian regime hypothesis. Afonso 
(2002) estimated a VAR model using Canzoneri et al. (2001) for 15 countries in the area that do not adequately 
evaluate the price-level budget theory. However, particularly for Shaposhnikov and Tkachev (2006) extrapolates a 
VAR model from 1998 to 2005 to illustrate a non-Ricardian regime and predict the effects of fiscal policy on the 
price.  

Fialho and Portugal (2005) demonstrate monetary dominance in Brazil using 1995–2003 data. In this 
framework, monetary and fiscal policy coordination resembles a game where the fiscal authority is passive, and the 
monetary authority is active. Monetary policy determines the surplus and debt for a given price level.  

The general price level theory has not been looked at much in Africa, so the results are not as evident. Kenkouo 
(2015) says that Cameroon and the Congo are controlled by CEMAC regarding money and financing, while Gabon, 
Equatorial Guinea, the Central African Republic, and Chad have had varied results. Chuku (2016) discovers a 
financial advantage for Nigeria, unlike Alfredo and Ribeiro (2009). 

Most of these investigations use linear models. Several regime-switching models (Chuku, 2016; Davig, Leeper, 
Galí, & Sims, 2006; Favero & Monacelli, 2005) investigate the general price level theory of finance in the U.S. and 
some E.U. countries to resolve these shortcomings. 

Semmler and Zhang (2010) evaluated France and Germany's general price level theory from 1969 to 1998 
using a Markov model. France's monetary and fiscal policies worked well together most of the time, particularly in 
the early 1970s and from 1980 to 1990. Germany's first and last policies were feeble strategic substitutes and 
complements. According to Davig et al. (2006), the two administrations alternated in the U.S. between 1948 and  
2004. The average monetary-dominant regime lasts 22 quarters, while active fiscal policy lasts 15 quarters. 

Favero and Monacelli (2005) state that U.S. fiscal policy operated from 1960 to 1980. It was dormant during 
the 1990s but reactivated in early 2001. These two findings disprove that U.S. policy was always passive after 
World War II. 

Ayoub, Farvaque, and Creel (2008). The budgetary theory of the price level distinguishes between Ricardian 
and non-Ricardian economic policies and their applicability to sub-periods in a country's economic history. 
Lebanon's transition from prosperity to conflict and reconstruction illustrates this theory. The authors want to 
evaluate the budgetary theory of the price level in situations where political regime changes establish 
macroeconomic benchmarks. Thus, the authors provide a theoretical framework for understanding the economic 
mechanisms at work in exceptional situations and a perspective on applying this budgetary theory  of the price 
level. Lebanon's disastrous policy history allows economists to analyze changes in monetary and fiscal regimes. In 
this example, we show that Lebanon's recent past has three phases corresponding to one of the fiscal theories of the 
price level regimes. Thus, economic policies (monetary and fiscal) would transition from central bank dominance 
(1965–1974) to war economies and fiscal dominance (1975–1990) and back to monetary dominance (1991–2005) . 
However, segregating policy regimes does not prove the fiscal theory. In monetarism, monetization and 
seigniorage may reduce the economic analysis of the fiscal regime-price level relationship. Thus, one must isolate 
monetary and fiscal relations to prove that Lebanon has a non-Ricardian regime. 

Romero and Marín (2017) examine whether public debt increases inflation. They study government debt, 
economic growth, money supply growth, and inflation. Kwon, McFarlane, and Robinson (2009) use the net debtors 
of a sample of countries to execute a panel-based estimation. For countries with high public debt, increasing public 
debt is inflationary. Ngambo and Biligil (2019) also examine how Cameroon's changing public debt impacts 
economic development and CEMAC's monetary policy. The results indicate that Cameroon's short-term debt does 
not impair growth. The CEMAC budgetary theory of the general price level is true by Kenkouo (2020). Using 
CEMAC data, Bohn (1998) estimated an MSVAR Markov model. Over the entire period, Cameroon is in a 
monetary-dominated regime, while Congo, Equatorial Guinea, and Chad are fiscally dominated. The Central 
African Republic and Gabon alternated administrations for two years each. Structural monetary vector 
autoregression with fiscal variables and impulse responses evaluates fiscal policy actions. Recently, Urquhart 
(2022) examined public debt and inflation, considering the fiscal theory of the price level with data from Paraguay. 

 

4.1. Methodology  
Extensive cooperation is necessary between monetary and fiscal policies to effectively achieve macroeconomic 

policy goals. This study examines the interplay between these policies, focusing on two levels of cooperation: goal 
attainment, such as enhancing the financial system and establishing institutional and operational arrangements. 
The first level of interaction revolves around financing the budget deficit and its implications for monetary 
management. Monetary policy stances significantly impact the government's ability to finance the budget deficit by 
influencing the cost of debt payment and determining the availability of financing sources. Concurrently, the public 
sector's financing strategy and financial requirements constrain the degree of independence attainable for monetary 
policy. In numerous countries, fiscal policy has taken precedence over monetary policy, leading central banks to 
frequently finance public sector deficits, including those arising from quasi-fiscal activities. This subordination of 
monetary policy to fiscal demands has often resulted in inflationary tendencies. In recent years, a global effort has 
been made to modernize financial markets and establish institutional and operational frameworks to facilitate the 
design and implementation of more effective policies. These initiatives encompass utilizing market-based monetary 
and debt management instruments, measures to enhance central bank independence, and in some cases, 
establishing strict rules-based monetary arrangements like currency boards. 

 
4.2. Data & Variables 

This study investigates the causal relationship between gross domestic product per capita (GDP/PC), the 
inflation rate (INFL), the interest rate (I), the monetary aggregate (M3), and public debt (PD), as well as the impact 
of monetary policy on the administration of Morocco's public debt. It also addresses coordination issues between 
fiscal and monetary policy in Morocco. The government's financing strategy and financial requirements will 
restrict the monetary authority's operational independence. To analyze the interplay between monetary policy and 
fiscal policy and to identify the long-run relationship between the time series, the empirical demonstration of the 
methodology described above centers on Morocco. This investigation used Moroccan yearly time series from 1960 



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to 2022. The World Bank and  International Monetary Fund (IMF) databases provided these statistics. Since 
policymakers use a variety of factors to figure out how the economy is doing, it may make sense to look at the 
economy using a variety of indicators. This may take the primary component of several measures of economic 
activity; however, past Taylor rule research has usually used the output gap or real marginal business expenses. 
Gross domestic product (GDP) measures economic activity. According to the research, the interest rate (I) and the 
amount of money in circulation (M3) are examples of monetary policy, while public debt (PD) is an example of 
fiscal policy.  

To study how fiscal policy and monetary policy function together, we model fiscal policy in a more general 
fashion that allows for data that is sometimes different and only sometimes from the same source. This method can 
examine debt sustainability and monetary policy. Time series analysis necessitates 20 observations, according to 
McCleary, Hay, Meidinger, and McDowall (1980). Time-series models should be fitted with 50 observations for 
robust results. A time series should be long enough to capture the phenomenon of interest, but more data is 
preferable. The study encompasses annual data from 1960 to 2022. This is enough data observations for VAR 
model results. Morocco is the country we are investigating for this study, and the variables specified for the study 
are the following: 

• Gross domestic product Per capita (GDP/GDP). 
• Public debt (PD). 
• Monetary aggregate (M3). 
• Consumer price index (INFL). 
• Interest rate (IT). 
 

Table 1. Variables used. 

Components INFL GDP/Pc PD M3 IT 

 Mean 3.641 1949.948 73.713 76.790 5.486 

 Median 2.205 1477.644 68.736 74.222 4.956 
 Maximum 12.492 3795.380 117.714 128.869 8.500 

 Minimum 0.303 666.715 45.442 35.026 2.568 
 Std. dev. 3.378 975.671 19.086 31.769 2.072 
 Skewness 1.214 0.416 0.688 0.089 0.295 

 Kurtosis 3.452 1.662 2.496 1.395 1.521 
 Jarque-Bera 10.687 4.340 3.761 4.561 4.434 
 Probability 0.004 0.114 0.152 0.102 0.108 

 Sum 152.951 81897.83 3095.964 3225.212 230.420 
 Sum sq. dev. 467.980 39029320 14936.82 41381.09 176.102 

 Observations 42 42 42 42 42 

 
The descriptive statistics of the data bring together all the data (mean, median, minimum value, maximum 

value, and standard deviation) and give us an idea of the level and the evolution of the data over time. Thus, the 
coefficients skewness, kurtosis, and the Jarque-Bera test statistic allow us to test the normality of the series studied. 
The table above is a representation of the descriptive statistics of the descriptive statistics of the variables studied. 
The table above shows that one of the most volatile variables is public debt and that GDP per capita is more 
volatile regarding standard deviation (std. dev.). We also note that debt, GDP per capita, the monetary aggregate, 
and the interest rate are normally distributed (Prob. Jarque-Bera > 5%), while the inflation rate is not. In this case, 
a heteroscedastic model would be preferable in the presence of ARCH. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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4.3. Descriptive Statistics 
The main variables of the study are annual series and presented in Figure 1 and their descriptive statistics in Table 1. 

 

40

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120

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81

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82

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91

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DP

0

2

4

6

8

10

12

14

19
80

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81

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82

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83

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84

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85

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INFL(IPC)

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M3

0

1,000

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3,000

4,000

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Pib/hab

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ti

 
Figure 1. Variables of the study. 

 
 

 



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Table 2. Stationarity of variables. 

Variables Stationarity 

ADF PP KPSS 

INFL I(0) I(0) I(0) 
GDP/Pc I(1) I(1) I(0) 

DP I(1) I(1) I(0) 
M3 I(1) I(1) I(0) 
IT I(1) I(1) I(0) 

 
Reading the results of the stationarity test of the substudy variables in Table 2, we can note the following 

remarks: 
Starting with the Augmented Dickey-Fuller/ADF test, the GDP/Pc, DP, M3, and IT series are integrated 

into order 1 (stationary after the first difference). At the same time, INFL remains stationary at level (without 
differentiation). Similarly, the Phillippe-Perron/PP test shows that the GDP/Pc, DP, M3, and IT series are 
integrated series of order 1 (stationary after the first difference). At the same time, INFL remains stationary at 
level (without differentiation). Finally, the third Kwiatkowski-Phillips-Schmidt-Shin/KPSS test shows that all 
series are stationary at level (without differentiation). 
 

4.4. Results  
After estimating the VAR model, we estimated the optimal number of lags, which provides statistically 

significant results with the minor parameters. The results of the model estimation are presented below in Table 3 . 
In our case, we chose the set of information criteria, namely: the Schwarz Information Criterion (SIC), Hannan-
Quinn Information Criterion (HQ), Akaike Information Criterion (AIC), Final Prediction Error (FPE), and 
Sequential Modified LR Test Statistic (LR), to select the model to be deployed. 

 
Table 3. Results of the optimum number of delays. 

 Lag LogL LR FPE AIC SC HQ 

0 -733.918 NA 1.97e+10 37.893 38.106 37.969 

1 -557.860 297.943* 8620236.* 30.146* 31.426* 30.605* 
2 -540.209 25.345 13426522 30.523 32.869 31.365 

3 -519.518 24.404 20011153 30.744 34.156 31.968 
 

Note: * p < 0.1. 

 
Table 4 shows that the five variables are not cointegrated, i.e., they have no long-term cointegrating 

relationship. Consequently, the null hypothesis of non-cointegration is accepted, as the trace test indicates no 
cointegrating equations. Moreover, we need a cointegrating relationship to adopt Engle and Granger (1987) error-
correction model. The next step is to use the VAR model. 

 
Table 4. Results of the Johansen cointegration test. 

Unrestricted cointegration rank test (Trace) 

Hypothesized  Trace 0.05  

No. of CE(s) Eigenvalue Statistic Critical value Prob.** 

None 0.511 66.104 69.818 0.095 
At most 1 0.354 37.442 47.856 0.326 
At most 2 0.280 19.959 29.797 0.425 

At most 3 0.136 6.777 15.494 0.603 
At most 4 0.022 0.923 3.841 0.336 
Note: ** p < 0.05. 

 
Table 5 below shows the estimated coefficients or effects of the VAR model. Indeed, the estimation results 

show that the effect of the interest rate on the inflation rate is positive and significant. In other words, a 1% 
increase in the interest rate raises the price level by 7%. Similarly, the effect of public debt on the price level is 
positive but insignificant, i.e., less than proportional: a 1% increase in public debt raises inflation by 0 .677479. In 
addition, Moroccan GDP per capita has a positive (non-significant) effect on the price level in Morocco. On the 
other hand, the monetary aggregate (M3) has significant negative effects. A 1% increase in the monetary aggregate 
reduces the price by 69%. 

 
Table 5. Results of estimation VAR. 

Components INFL GDP/PC PD M3 IT 

INFL(-1) 

0.451 
(0.150) 

[ 3.008] 

9.014 
(9.086) 

[ 0.992] 

0.677 
(0.420) 

[ 1.612] 

-0.695 
(0.298) 

[-2.326] 

0.071 
(0.031) 

[ 2.263] 

GDP/PC(-1) 

0.000 
(0.001) 

[ 0.195] 

0.661 
(0.067) 

[ 9.836] 

0.006 
(0.003) 

[ 2.152] 

0.002 
(0.002) 

[ 0.954] 

0.000 
(0.000) 

[ 1.383] 

PD(-1) 

0.021 
(0.033) 

[ 0.645] 

6.547 
(2.004) 

[ 3.266] 

0.840 
(0.092) 

[ 9.063] 

-0.109 
(0.065) 

[-1.668] 

0.009 
(0.007) 

[ 1.317] 

M3(-1) 

-0.070 
(0.045) 

[-1.545] 

15.374 
(2.772) 

[ 5.545] 

-0.345 
(0.128) 

[-2.695] 

0.777 
(0.091) 

[ 8.531] 

-0.0163 
(0.009) 

[-1.680] 



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Components INFL GDP/PC PD M3 IT 

IT(-1) 

-0.668 
(0.400) 

[-1.667] 

2.791 
(24.24) 

[ 0.115] 

-2.056 
(1.121) 

[-1.834] 

-0.820 
(0.797) 

[-1.028] 

0.758 
(0.084) 

[ 8.942] 

C 

8.912 
(4.534) 

[ 1.965] 

-985.945 
(274.326) 
[-3.594] 

34.357 
(12.686) 
[ 2.708] 

30.153 
(9.021) 

[ 3.342] 

0.948 
(0.960) 

[ 0.988] 

R-squared 0.657 0.985 0.921 0.985 0.962 
Adj. R-squared 0.608 0.983 0.909 0.983 0.956 
Sum sq. resids 148.531 543709.7 1162.729 587.955 6.660 

S.E. equation 2.060 124.637 5.763 4.0986 0.436 
F-statistic 13.449 485.904 81.727 464.396 177.690 

Log likelihood -84.564 -252.774 -126.748 -112.769 -20.918 
Akaike AIC 4.417 12.623 6.475513 5.793 1.313 
Schwarz SC 4.668 12.873 6.726 6.044 1.563 

Mean dependent 3.501 1970.736 74.053 77.809 5.501 
S.D. dependent 3.293 978.330 19.195 31.461 2.095 

 
Table 6. Causality between sub-study variables. 

Pairwise granger causality tests 

Date: 06/28/23   Time: 12:51 

Sample: 1980 2021 

Lags: 2   
 Null hypothesis: Obs. F-statistic Prob. 

 PIB_HAB does not Granger Cause INFL_IPC_ 40 2.068 0.141 

 INFL_IPC_ does not Granger Cause PIB_HAB 1.070 0.353 
 DP does not Granger Cause INFL_IPC_ 40 4.616 0.016 
 INFL_IPC_ does not Granger Cause DP 4.331 0.020 

 M3 does not Granger Cause INFL_IPC_ 40 2.388 0.106 
 INFL_IPC_ does not Granger Cause M3 1.914 0.162 

 TI does not Granger Cause INFL_IPC_ 40 0.332 0.719 
 INFL_IPC_ does not Granger Cause TI 5.055 0.011 
 DP does not Granger Cause PIB_HAB 40 0.176 0.839 

 PIB_HAB does not Granger Cause DP 0.210 0.811 
 M3 does not Granger Cause PIB_HAB 40 11.221 0.000 

 PIB_HAB does not Granger Cause M3 0.328 0.722 
 TI does not Granger Cause PIB_HAB 40 1.082 0.349 
 PIB_HAB does not Granger Cause TI 1.708 0.195 

 M3 does not Granger Cause DP 40 4.973 0.012 
 DP does not Granger Cause M3 5.950 0.006 

 TI does not Granger Cause DP 40 0.050 0.950 
 DP does not Granger Cause TI 3.360 0.046 
 TI does not Granger Cause M3 40 1.736 0.190 

 M3 does not Granger Cause TI 4.801 0.014 

 
Table 6 presents the results of the causality test between the substudy variables, which we will discuss in the 

next step:  
 

5. Discussion  
In this work, we studied the fiscal theory of the price level, first theoretically and then produced empirical 

evidence of the impact of public debt on the price level through a VAR model on Moroccan data. We have thus 
highlighted the long- and short-term effects of public debt on the price level—the results between our selected 
variables through Johansson cointegration and vector autoregression. We also performed a Toda -Yamamoto 
causality analysis because of the non-stationarity of the variables. 

Our study shows two bidirectional causalities between debt and inflation on the one hand and debt and money 
supply on the other. A unidirectional causality can also be reported: money supply M3 and public debt cause 
interest; money supply causes GDP per capita; inflation causes money supply. 
Similarly, the estimation results of our work confirm the theoretical contributions of researchers in the field: 

1. The effect of public debt on the price level is positive but insignificant, i.e., less than proportional: a 1% 
increase in public debt increases inflation by 0.677479. 

2. Moroccan GDP per capita has a positive (insignificant) effect on the price level in Morocco. 
3. The monetary aggregate (M3) has significant adverse effects. 

However, the estimation results show that the effect of the interest rate on the inflation rate is positive and 
significant, i.e., a 1% increase in the interest rate raises the price level by 7%. This contradicts the theoretical 
results. 

Furthermore, the fact that the variation in inflation is mainly explained by the money supply, suggests that 
monetary policy is effectively controlling the Moroccan economy. However, this control is very weakly influenced 
by debt policy. 

As a result, the level of Moroccan public debt is a matter of concern for the authorities, given the significant 
influence it exerts on the economy. Thus, while the positive impact should reassure us about the effectiveness of the 
debt policy, debt dynamics remain a concern insofar as they affect the economy. However, the authorities should 
pay less attention to the accumulation and speed of debt, given its minor immediate impact on the economy and the 
fact that it reduces inflation. This would place Morocco in a regime of monetary dominance. 



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https://doi.org/10.1016/j.ejpoleco.2009.04.001
https://doi.org/10.1111/1468-0297.00726
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