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Fiscal Dominance and the Long-Term Interest Rate

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  • Philip Turner

Abstract

Very high government debt/GDP ratios will increase uncertainty about inflation and the future path of real interest rates. This will reduce substitutability across the yield curve. In such circumstances, changes in the short-term/long-term mix of government debt held by the public will become more effective in achieving macroeconomic objectives. In circumstances of imperfect substitutability, central bank purchases or sales of government bonds have been seen historically as a key tool of monetary policy. Since the mid-1990s, however, responsibility for government debt management has been assigned to other bodies. The mandates of the government debt manager could have the unintended consequence of making their actions endogenous to macroeconomic policies. There is evidence that decisions on the maturity of debt have in the past been linked to both fiscal and monetary policy. Recent Quantitative Easing (QE) by the central bank must be analysed from the perspective of the consolidated balance sheet of government and central bank.

Suggested Citation

  • Philip Turner, 2011. "Fiscal Dominance and the Long-Term Interest Rate," FMG Special Papers sp199, Financial Markets Group.
    • Handle: RePEc:fmg:fmgsps:sp199
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP199.pdf
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    References listed on IDEAS

    as
    1. Chadha,Jagjit S. & Holly,Sean (ed.), 2011. "Interest Rates, Prices and Liquidity," Cambridge Books, Cambridge University Press, number 9781107014732.
    2. Capie,Forrest, 2010. "The Bank of England," Cambridge Books, Cambridge University Press, number 9780521192828.
    3. Bank for International Settlements, 2009. "Household debt: implications for monetary policy and financial stability," BIS Papers, Bank for International Settlements, number 46.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Banques centrales et dette publique : les liaisons dangereuses ?
      by Laurence Duboys Fresney in OFCE le blog on 2014-03-05 16:17:31
    2. Central banks and public debt: dangerous liaisons?
      by Laurence Duboys Fresney in OFCE le blog on 2014-03-06 19:56:31

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