Sovereign Debt Management as an Instrument of Monetary Policy: An Overview

Abstract

The composition of public debt by maturity is irrelevant in the standard New Keynesian model of monetary policy. Nevertheless, central banks have, since the outset of the crisis, purchased large amounts of government bonds in the attempt to support economic activity and stem deflationary pressures. Such moves have often been justified by appealing to portfolio rebalancing effects, which are not well understood at a conceptual level. Without better theory, assessing their empirical relevance might also prove elusive. This paper reviews what theory has to say about the role of sovereign debt management as a tool of monetary policy.

Full publication: Threat of fiscal dominance?

Keywords: Public debt, portfolio rebalancing effects, money, liquidity, Tobin, Friedman, preferred habitat, term structure of interest rates

JEL Classification: E4, E5, E6, H63