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A Continuous-Time Model of the Term Structure of Interest Rates with Fiscal-Monetary Policy Interactions

Author

Listed:
  • Marzo, Massimiliano

    () (Universita di Bologna;)

  • Romagnoli , Silvia

    () (Universita di Bologna)

  • Zagaglia, Paolo

    (Dept. of Economics, Stockholm University)

Abstract

We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.

Suggested Citation

  • Marzo, Massimiliano & Romagnoli , Silvia & Zagaglia, Paolo, 2008. "A Continuous-Time Model of the Term Structure of Interest Rates with Fiscal-Monetary Policy Interactions," Research Papers in Economics 2008:6, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2008_0006
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    References listed on IDEAS

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    1. John H. Cochrane, 1999. "A Frictionless View of U.S. Inflation," NBER Chapters,in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421 National Bureau of Economic Research, Inc.
    2. Breeden, Douglas T., 1986. "Consumption, production, inflation and interest rates : A synthesis," Journal of Financial Economics, Elsevier, vol. 16(1), pages 3-39, May.
    3. Stulz, Rene M, 1986. " Asset Pricing and Expected Inflation," Journal of Finance, American Finance Association, vol. 41(1), pages 209-223, March.
    4. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    5. 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.
    6. Balduzzi, Pierluigi, 2007. "Money and asset prices in a continuous-time Lucas and Stokey cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2713-2743, August.
    7. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 381-399.
    8. Grossman, Sanford J. & Shiller, Robert J., 1982. "Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information," Journal of Financial Economics, Elsevier, vol. 10(2), pages 195-210, July.
    9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-384, March.
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    More about this item

    Keywords

    Bond Pricing; Fiscal Policy; Mathematical Methods;

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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