Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level
AbstractThe fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze long-term debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short term debt. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which long-term debt helps to stabilize inflation, and I find that the optimal inflation-stabilizing policy produces time series that are surprisingly similar to U.S. surplus and debt time series.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6771.
Date of creation: Oct 1998
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Publication status: published as Cochrane, John H. "Long-Term Debt And Optimal Policy In The Fiscal Theory Of The Price Level," Econometrica, 2001, v69(1,Jan), 69-116.
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- Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
- John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," CRSP working papers 478, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
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