FTPL and the Maturity Structure of Government Debt in the New Keynesian Model

Max Ole Liemen and Olaf Posch

No 9840, CESifo Working Paper Series from CESifo

Abstract: In this paper, we revisit the fiscal theory of the price level (FTPL) within the New Keynesian (NK) model. We show in which cases the average maturity of government debt matters for the transmission of policy shocks. The central task of this paper is to shed light on the theoretical predictions of the maturity structure on macro dynamics with an emphasis on model-implied expectations. In particular, we address the transmission channels of monetary and fiscal policy shocks on the interest rate and inflation dynamics. Our results illustrate the role of the maturity of existing debt in the wake of skyrocketing debt-to-GDP ratios and increasing government expenditures. We highlight our results by quantifying the effects of the large-scale US fiscal packages (CARES) and predict a surge in inflation if the deficits are not sufficiently backed by future surpluses.

Keywords: NK models; FTPL; government debt; maturity structure; CARES (search for similar items in EconPapers)
JEL-codes: C61 E12 E32 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9840

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