Discount Rates, Debt Maturity, and the Fiscal Theory
Howard Kung and
Staff Working Papers from Bank of Canada
This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect the expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory directly depend on the conditional nominal term premium, giving rise to an optimal debt maturity policy that is state dependent. In a calibrated macro-finance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.
Keywords: Fiscal policy; Interest rates; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E63 G12 (search for similar items in EconPapers)
Pages: 62 pages
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-58
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