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A convenient truth: The convenience yield, low interest rates and implications for fiscal policy

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  • Dennis Bonam

Abstract

Some countries currently face historically low interest rates on government debt due to a positive ‘convenience yield’ arising from an excess demand for safe and liquid assets. This low interest rate environment has raised interest in the role of fiscal stabilization policy. We study the convenience yield and its implications for fiscal policy in a New Keynesian model where households derive utility from government bonds. We find that the convenience yield expands the set of sustainable fiscal policies and renders countercyclical fiscal policy successful in stabilizing business cycle fluctuations. Conveniently, fiscal policies that stabilize output rather than debt are feasible, welfare enhancing and can even reduce the risk of exploding debt dynamics if the convenience yield is positive.Â

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  • Dennis Bonam, 2020. "A convenient truth: The convenience yield, low interest rates and implications for fiscal policy," Working Papers 700, DNB.
    • Handle: RePEc:dnb:dnbwpp:700
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    Cited by:

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    2. Kaldorf, Matthias & Röttger, Joost, 2023. "Convenient but risky government bonds," Discussion Papers 15/2023, Deutsche Bundesbank.

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    More about this item

    Keywords

    convenience yield; low interest rate; fiscal policy; debt sustainability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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