IDEAS home Printed from https://ideas.repec.org/p/gnt/wpaper/30.html

Fiscal Dominance and Asset Price Redistribution

Author

Listed:
  • Héctor J. Villarreal

    (School of Government and Public Transformation, Tecnológico de Monterrey)

Abstract

This paper studies the distributional consequences of fiscal dominance through asset prices. When public debt constrains monetary policy, interest rates may decline as debt increases. Lower discount rates raise asset valuations, generating capital gains for asset holders. In a simple framework combining public debt dynamics, fiscal reaction functions, and a debt-sensitive interest rate rule, we derive a formal condition under which fiscal dominance generates redistribution toward asset-owning households through the asset price channel, and show that the wealth share of asset holders is increasing in public debt.

Suggested Citation

  • Héctor J. Villarreal, 2026. "Fiscal Dominance and Asset Price Redistribution," Working Paper Series of the School of Government and Public Transformation 30, School of Governement and Public Transformation.
    • Handle: RePEc:gnt:wpaper:30
    as

    Download full text from publisher

    File URL: https://egobiernoytp.tec.mx/sites/default/files/2026-04/fiscal_dominance_asset_price_redistribution.pdf
    File Function: First version, 2026
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    2. Bianchi, Francesco & Melosi, Leonardo, 2019. "The dire effects of the lack of monetary and fiscal coordination," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 1-22.
    3. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    4. John H. Cochrane, 2011. "Presidential Address: Discount Rates," Journal of Finance, American Finance Association, vol. 66(4), pages 1047-1108, August.
    5. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    6. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    7. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
    8. Gauti B. Eggertsson & Neil R. Mehrotra & Jacob A. Robbins, 2019. "A Model of Secular Stagnation: Theory and Quantitative Evaluation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 1-48, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. John Cochrane, 2022. "The fiscal root of inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 22-40, July.
    2. Michau, Jean-Baptiste, 2025. "Fiscal policy under secular stagnation: An optimal pump-priming strategy," Journal of Economic Dynamics and Control, Elsevier, vol. 175(C).
    3. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    4. Hirofumi Wakimoto, 2026. "JFR-rg: A New Macroeconomic Framework for High-Debt, Low-Growth Economies under Financial Repression," Papers 2604.09663, arXiv.org, revised Apr 2026.
    5. Gergő Motyovszki & Philipp Pfeiffer & Jan in ’t Veld, 2024. "The Implications of Public Investment for Debt Sustainability," European Economy - Discussion Papers 204, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2024. "The U.S. Public Debt Valuation Puzzle," Econometrica, Econometric Society, vol. 92(4), pages 1309-1347, July.
    7. Bonchi, Jacopo & Caracciolo, Giacomo, 2025. "Declining r∗ in the US: The role of Social Security," Journal of Public Economics, Elsevier, vol. 241(C).
    8. Kreamer, Jonathan, 2022. "Financial intermediation and the supply of liquidity," Journal of Financial Stability, Elsevier, vol. 61(C).
    9. Plantin, Guillaume & Barthélemy, Jean & Mengus, Eric, 2019. "Public Liquidity Demand and Central Bank Independence," CEPR Discussion Papers 14160, Centre for Economic Policy Research.
    10. Van Nieuwerburgh, Stijn & Elenev, Vadim & Landvoigt, Tim & Shultz, Patrick, 2021. "Can Monetary Policy Create Fiscal Capacity?," CEPR Discussion Papers 16414, Centre for Economic Policy Research.
    11. Maria Manuel Campos & José Miguel Cardoso da Costa & Sandra Gomes & Pascal Jacquinot, 2025. "Monetary and fiscal policy interactions in the aftermath of an inflationary shock," Working Papers w202515, Banco de Portugal, Economics and Research Department.
    12. Maurice Obstfeld & Kenneth Rogoff, 2021. "Revisiting speculative hyperinflations in monetary models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 1-11, April.
    13. Bonam, Dennis & Ciccarelli, Matteo & Gomes, Sandra & Aldama, Pierre & Bańkowski, Krzysztof & Buss, Ginters & da Costa, José Cardoso & Christoffel, Kai & Elfsbacka Schmöller, Michaela & Jacquinot, Pasc, 2024. "Challenges for monetary and fiscal policy interactions in the post-pandemic era," Occasional Paper Series 337, European Central Bank.
    14. Farmer, Roger & Farmer, Leland, 2022. "Zoomers and Boomers: Asset Prices and Intergenerational Inequality," CEPR Discussion Papers 17594, Centre for Economic Policy Research.
    15. Marx, Magali & Mojon, Benoît & Velde, François R., 2021. "Why have interest rates fallen far below the return on capital?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 57-76.
    16. Di Bucchianico, Stefano, 2021. "Inequality, household debt, ageing and bubbles: A model of demand-side Secular Stagnation," IPE Working Papers 160/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    17. Atanas Pekanov, 2020. "Die Europäische Währungsunion im Wandel," WIFO Monatsberichte (monthly reports), WIFO, vol. 93(3), pages 165-175, March.
    18. Afonso, António & Gomes-Pereira, Francisco, 2025. "Does monetary policy influence euro area fiscal sustainability?," Economic Modelling, Elsevier, vol. 152(C).
    19. Michael J. Boskin, 2020. "Are Large Deficits and Debt Dangerous?," NBER Working Papers 26727, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gnt:wpaper:30. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fabian Fuentes-Rivas (email available below). General contact details of provider: https://edirc.repec.org/data/emitemx.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.