Monetary Policy, Bond Returns and Debt Dynamics
40 Pages Posted: 3 Feb 2015 Last revised: 27 Mar 2015
Date Written: March 13, 2015
Using the government’s intertemporal budget constraint, we quantify the contribution of returns paid on the U.S. government’s debt portfolio to the evolution of the debt-to-GDP ratio. We show that announcements of unconventional monetary policy measures by the Federal Reserve between 2008.IV and 2012, as a part of macroeconomic stabilization, were associated with a sizable increase in returns and debt-to-GDP ratios and contributed to fiscal imbalances. We use the Federal Reserve’s portfolio com- position as a proxy for unconventional monetary policy measures and show that it is significantly related to future bond returns and fiscal balances.
Keywords: monetary policy, debt dynamics, bond returns, predictability
JEL Classification: C5, E4, E6, G1, H6
Suggested Citation: Suggested Citation