EconPapers    
Economics at your fingertips  
 

The effects of secondary markets for government bonds on inflation dynamics

Begoña Domínguez and Pedro Gomis-Porqueras

Review of Economic Dynamics, 2019, vol. 32, 249-273

Abstract: We analyze how trading in secondary markets for public debt changes 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 monetary steady state and traditional passive/active policy prescriptions deliver locally determinate equilibria. In contrast, when agents trade in secondary markets and bonds are scarce, there exists a liquidity premium on public debt and bonds affect inflation dynamics and vice versa. In this 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 locally determinate equilibria. However, monetary and fiscal policies can be used as an equilibrium selection device. We find that active monetary policies are more likely to deliver real and nominal determinacy when the long-run inflation target is low. (Copyright: Elsevier)

Keywords: Taxes; Inflation; Secondary markets; Liquidity premium (search for similar items in EconPapers)
JEL-codes: E40 E61 E62 H21 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2018.10.004
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Software Item: Code and data files for "The effects of secondary markets for government bonds on inflation dynamics" (2018) Downloads
Working Paper: The Effects of Secondary Markets for Government Bonds on Inflation Dynamics (2016) Downloads
Working Paper: The Effects of Secondary Markets for Government Bonds on Inflation Dynamics (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:18-50

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2018.10.004

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2025-03-19
Handle: RePEc:red:issued:18-50