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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
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    File URL: https://egobiernoytp.tec.mx/sites/default/files/2026-04/fiscal_dominance_asset_price_redistribution.pdf
    File Function: First version, 2026
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    Keywords

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    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

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