Can Passive Monetary Policy Decrease the Debt Burden?

Ruoyun Mao, Wenyi Shen and Shu-Chun Yang

No 23-A007, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: Large expansionary fiscal measures are often implemented with monetary accommoda- tion during an economic crisis. When a government is highly indebted, and the timing of switching to the conventional regime M (passive fiscal/active monetary policies) is uncertain, a government spending increase in regime F (active fiscal/passive monetary policies) increases government debt. Such regime uncertainty dampens inflation and debt revaluation effects. Also, as regime uncertainty generates a smaller real interest rate decline, debt servicing costs fall less, and tax revenues increase less, than in the fixed regime F. These factors contribute to reversing the debt decline for a spending increase in the fixed regime F. The result holds under adverse supply shocks and po- tentially higher capital taxes, relevant factors in the post-COVID U.S. economy.

JEL-codes: E32 E52 E62 E63 H30 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Can passive monetary policy decrease the debt burden? (2024)
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