The Effects of Secondary Markets for Government Bonds on Inflation Dynamics

Begona Dominguez and Pedro Gomis-Porqueras

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze how trading in secondary markets for public debt change the inherent links between monetary and fiscal policy, by studying both inflation and debt dynamics. When agents do not trade in these markets, there exists a unique steady state and traditional passive/active policy prescriptions are useful in delivering determinate equilibria. In contrast, when agents trade in secondary markets and bonds are scarce, there exist a liquidity premium on public debt and bonds affect inflation dynamics and vice versa. Then, in a monetary equilibrium, the government budget constraint can be satisfied for different combinations of inflation and debt. Thus, self-fulfilling beliefs that deliver multiple steady states are possible. Moreover, traditional passive/active policy prescriptions are not always useful in delivering determinate equilibria. However, monetary and fiscal policies can be used as an equilibrium selection device. We find that, with a low inflation target, active monetary policies are more likely to deliver real and nominal determinacy and further amplify the effectiveness of these policies in reducing steady state inflation.

Keywords: taxes; inflation; secondary markets, liquidity premium. (search for similar items in EconPapers)
JEL-codes: E4 E61 E62 H21 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://mpra.ub.uni-muenchen.de/82446/9/MPRA_paper_82446.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/82689/1/MPRA_paper_82689.pdf revised version (application/pdf)

Related works:
Journal Article: The effects of secondary markets for government bonds on inflation dynamics (2019)
Working Paper: The Effects of Secondary Markets for Government Bonds on Inflation Dynamics (2016)
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