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Fiscal Discount Rates and Debt Maturity

Listed author(s):
  • Howard Kung

    (London Business School)

  • Gonzalo Morales

    (University of Alberta)

  • Alexandre Corhay

    (University of Toronto)

Registered author(s):

    This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations under fiscal stress in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure dampens (amplifies) the stimulative effects of quantitative easing policies.

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    File URL: https://economicdynamics.org/meetpapers/2017/paper_840.pdf
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    Paper provided by Society for Economic Dynamics in its series 2017 Meeting Papers with number 840.

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    Date of creation: 2017
    Handle: RePEc:red:sed017:840
    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/
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