Fiscal Dominance and the Maturity Structure of Debt

Piyali Das, Chetan Ghate and Subhadeep Halder

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We develop a dynamic model of monetary-fiscal interactions and government debt. We introduce a novel channel of fiscal dominance through the maturity structure. Faced with an expansionary fiscal policy shock, extending debt-maturity under fiscal dominance becomes a strategic tool for maintaining debt sustainability without immediate price-level adjustments by the monetary authority. We show that extending the maturity of debt raises the interest burden of debt. To validate the results empirically, we assemble a novel central government security level dataset between 1999-2022 for India. We find that the probability of issuing a long-term security is approximately 7 percentage points higher in a fiscal dominant regime compared to a monetary dominant regime. Using the approach in Hall and Sargent (2011) for debt-decomposition, we show that the nominal return on marketable and non-marketable debt is the largest component driving public debt increases in periods of fiscal dominance between 1999-2022. Our paper highlights the ’maturity-structure’ channel of fiscal dominance, and provides a framework to quantify the impact of fiscal dominance on the interest-rate burden of sovereign debt in a large emerging market economy.

Keywords: debt decomposition; fiscal dominance; monetary-fiscal interactions; macroeconomic stabilization (search for similar items in EconPapers)
JEL-codes: E43 E61 E63 E65 H63 O23 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2025-05
New Economics Papers: this item is included in nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-29

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