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A continuous-time model of the term structure of interest rates with fiscal-monetary policy interactions

Massimiliano Marzo, Silvia Romagnoli and Paolo Zagaglia

No 25/2008, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.

Keywords: bond pricing; fiscal policy; mathematical methods (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2008
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