Fiscal Discount Rates and Debt Maturity

Howard Kung, Gonzalo Morales and Alexandre Corhay
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Howard Kung: London Business School
Alexandre Corhay: University of Toronto

No 840, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations under fiscal stress in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure dampens (amplifies) the stimulative effects of quantitative easing policies.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:840

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