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Fiscal Dominance: Implications for Bond Markets and Central Banking

Author

Listed:
  • Jean Barthelemy
  • Eric Mengus

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

Fiscal dominance refers to situations in which monetary policy is constrained by the public sector's budget constraint. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government and the central bank.

Suggested Citation

  • Jean Barthelemy & Eric Mengus & Guillaume Plantin, 2024. "Fiscal Dominance: Implications for Bond Markets and Central Banking," Working Papers hal-05107631, HAL.
    • Handle: RePEc:hal:wpaper:hal-05107631
    DOI: 10.2139/ssrn.4989409
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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