The maturity structure of debt, monetary policy and expectations stabilization
This paper identifies a channel by which changes in the size and composition of government debt might generate macroeconomic instability in a standard New Keynesian model. The mechanism depends on failures of Ricardian equivalence because of learning dynamics. Under rational expectations, the model has the prediction that Ricardian equivalence holds, and the scale and composition of public debt held by households is irrelevant to the determination of inflation and output. Under learning, holdings of the public debt are perceived as net wealth, with the resulting expenditure effects shown to be destabilizing, depending on both the scale and composition of the public debt. Very short and long average debt maturities are conducive to stability, while short-to-medium average maturities tend to generate instability in the sense that much more aggressive monetary policy is required to prevent divergent learning dynamics. More heavily indebted economies are more sensitive to adjustments in maturity structure. This suggests there might be considerations, aside from the presumed stimulus from large-scale asset purchases via lower longer-term interest rates, that are relevant to evaluating recent proposals for further quantitative easing in the United States.
|Date of creation:||2011|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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.:
- 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 402-417, June.
- Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
- Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997.
"Monetary Policy Rules in Practice: Some International Evidence,"
97-32, C.V. Starr Center for Applied Economics, New York University.
- Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
- Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 1991.
"Yield Spreads and Interest Rate Movements: A Bird's Eye View,"
Review of Economic Studies,
Oxford University Press, vol. 58(3), pages 495-514.
- John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
- Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
- Michael Woodford, 2001.
"Fiscal Requirements for Price Stability,"
NBER Working Papers
8072, National Bureau of Economic Research, Inc.
- Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar, pages -.
- S. Rao Aiyagari, 1993.
"Uninsured idiosyncratic risk and aggregate saving,"
502, Federal Reserve Bank of Minneapolis.
- Robert E. Hall, 2009. "Reconciling Cyclical Movements in the Marginal Value of Time and the Marginal Product of Labor," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 281-323, 04.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:1287. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.