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A continuous-time model of the term structure of interest rates with fiscal-monetary policy interactions

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  • Marzo, Massimiliano
  • Romagnoli, Silvia
  • Zagaglia, Paolo

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," Bank of Finland Research Discussion Papers 25/2008, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2008_025
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    More about this item

    Keywords

    bond pricing; fiscal policy; mathematical methods;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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