Default Risk on Government Bonds, Deflation, and Inflation
This paper analyzes the impact of deflation and inflation on the real interest rates of GBs using an overlapping generations model with the relationship between the real interest rate of GBs and the fiscal consolidation rule. We find that deflation may lower the real interest rate of GBs to the same level of public debt to capital, even if the fiscal consolidation rule is the same, as opposed to the conventional view that the real interest rate of GBs is determined independent of deflation if the Fisher equation holds. Our results are consistent with how the real interest rates of Japanese GBs react in periods of deflation. This paper also addresses the impact of fiscal inflation (i.e., monetizing all parts of the GB’s default using monetary policy). We calculate the expected fiscal inflation when the default rate in the event of fiscal consolidation is raised. The fiscal inflation may be extremely high if the extent of the required tax increase in fiscal consolidation is low. Initial inflation accelerates the expected fiscal inflation, but initial deflation suppresses it.
|Date of creation:||Feb 2012|
|Date of revision:|
|Contact details of provider:|| Postal: 2-1 Naka, Kunitachi City, Tokyo 186-8603|
Web page: http://cis.ier.hit-u.ac.jp/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harald Uhlig, 2009.
"A Model of a Systemic Bank Run,"
2009-006, Becker Friedman Institute for Research In Economics.
- John H. Cochrane, 2010.
"Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic,"
NBER Working Papers
16087, National Bureau of Economic Research, Inc.
- Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-37, October.
- Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 191-240, 04.
- 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, vol. 4(3), pages 381-99.
- Bernoth, Kerstin & Schuknecht, Ludger & von Hagen, Jürgen, 2004. "Sovereign Risk Premia in the European Bond Market," CEPR Discussion Papers 4465, C.E.P.R. Discussion Papers.
- Kazumasa Oguro & Motohiro Sato, 2014.
"Public debt accumulation and fiscal consolidation,"
Taylor & Francis Journals, vol. 46(7), pages 663-673, March.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- John H. Cochrane, 1999.
"A Frictionless View of U.S. Inflation,"
in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421
National Bureau of Economic Research, Inc.
- John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," NBER Working Papers 6646, National Bureau of Economic Research, Inc.
- John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," CRSP working papers 479, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Franklin Allen & Douglas Gale, 1976.
"Optimal Financial Crises,"
Center for Financial Institutions Working Papers
97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- 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.
- Bernardin Akitoby & Thomas Stratmann, 2008.
"Fiscal Policy and Financial Markets,"
Royal Economic Society, vol. 118(533), pages 1971-1985, November.
- Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
- Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
When requesting a correction, please mention this item's handle: RePEc:hit:cisdps:537. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Resources Section, Hitotsubashi University Library)
If references are entirely missing, you can add them using this form.