Fiscal hedging with nominal assets

Hanno Lustig, Christopher Sleet and Sevin Yeltekin

Journal of Monetary Economics, 2008, vol. 55, issue 4, pages 710-727

Abstract: We analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes, nominal rigidities, nominal debt of various maturities and short-selling constraints. Optimal policy prescribes the almost exclusive use of long term debt. Such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods.

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Journal of Monetary Economics is edited by R. G. King and C. I. Plosser

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