QE in the Fiscal Theory: A Risk-Based View

52 Pages Posted: 7 Jun 2017

See all articles by Alexandre Corhay

Alexandre Corhay

University of Toronto - Rotman School of Management

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Gonzalo Morales

University of Alberta

Date Written: June 5, 2017

Abstract

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. Open market debt maturity operations are non-neutral when the slope of the nominal yield curve 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.

Keywords: Fiscal Theory of the Price Level, Government Debt, Maturity Structure, Inflation, Bond Risk Premia, Markov-Switching DSGE, Nonlinear Solution Methods, Time-Varying Risk Premia

Suggested Citation

Corhay, Alexandre and Kung, Howard and Morales, Gonzalo, QE in the Fiscal Theory: A Risk-Based View (June 5, 2017). Rotman School of Management Working Paper No. 2981085. Available at SSRN: https://ssrn.com/abstract=2981085 or http://dx.doi.org/10.2139/ssrn.2981085

Alexandre Corhay

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
4169780512 (Phone)

Howard Kung (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gonzalo Morales

University of Alberta ( email )

Edmonton, AB T6G 2R3
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
56
Abstract Views
437
rank
379,912
PlumX Metrics