Government Debt and the Fiscal Channels of Monetary Policy

Sean Lavender

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper shows how the design of fiscal policy and the characteristics of government debt can drive significant differences in monetary transmission within and across countries with different fiscal contexts, and across models with different fiscal specifications. Using a tractable HANK model, I derive analytical expressions for the effects of fiscal policy on monetary transmission as the sum of three channels: a debt service channel, a debt composition channel, and a fiscal cyclicality channel. The magnitudes and directions of these channels are strongly context dependent, being determined by the interactions between the size and composition of government debt, the choice of fiscal rule, the progressivity of the marginal fiscal instrument, and the distribution of government debt ownership. For a given fiscal block used in a theoretical model, or for a given fiscal context observed in the data, the framework explains when the fiscal channels are large or small, and why they amplify or dampen monetary policy.

Keywords: Monetary-Fiscal Interactions; HANK Models; Government Debt (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 (search for similar items in EconPapers)
Date: 2026-10-09
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2683

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