A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt

John Cochrane

No 26745, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I construct a simple model with sticky prices and interest rate targets, closed by fiscal theory of the price level with long-term debt and fiscal and monetary policy rules. Fiscal surpluses rise following deficits, to repay accumulated debt, but surpluses do not respond to all values of unexpected inflation and deflation. This specification avoids common puzzles and produces reasonable responses to fiscal and monetary policy shocks. It allows an easy translation of any new-Keynesian model, and it allows one to study a whole sample with active fiscal policy.

JEL-codes: E3 E31 E32 E4 E5 E6 E62 E63 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
Note: AP EFG ME
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Citations: View citations in EconPapers (7)

Published as John H. Cochrane, 2021. "A fiscal theory of monetary policy with partially-repaid long-term debt," Review of Economic Dynamics, .

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