The Backing of Government Debt and the Price Level

Rui Castro, Carlos de Resende and Francisco Ruge-Murcia

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: This paper studies the interdependence between fiscal and monetary policies, and their joint role in the determination of the price level. The government is characterized by a long-run fiscal policy rule whereby a given fraction of the outstanding debt, say d, is backed by the present discounted value of current and future primary surpluses. The remaining debt is backed by seigniorage revenue. The parameter d characterizes the interdependence between fiscal and monetary authorities. It is shown that in a standard monetary economy, this policy rule implies that the price level depends not only on the money stock, but also on the proportion of debt that is backed with money. Empirical estimates of d are obtained for OECD countries using data on nominal consumption, monetary base, and debt. Results indicate that debt plays only a minor role in the determination of the price level in these economies. Estimates of d correlate well with institutional measures of central bank independence.

Keywords: Ricardian/Non-Ricardian regimes; policy rules; central banking (search for similar items in EconPapers)
JEL-codes: E31 E42 E50 E63 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2003
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.cireqmontreal.com/wp-content/uploads/cahiers/16-2003-cah.pdf (application/pdf)

Related works:
Working Paper: The Backing of Government Debt and the Price Level (2003)
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:mtl:montec:16-2003

Access Statistics for this paper

More papers in Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().