Discount Rates, Debt Maturity, and the Fiscal Theory

61 Pages Posted: 9 Aug 2021

See all articles by Alexandre Corhay

Alexandre Corhay

University of Toronto - Rotman School of Management

Thilo Kind

London Business School

Howard Kung

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

Gonzalo Morales

University of Alberta

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2021

Abstract

This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect the expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory directly depend on the conditional nominal term premium, giving rise to an optimal debt maturity policy that is state dependent. In a calibrated macro-finance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.

Keywords: Term structure of interest rates, Fiscal theory of the price level, Bond risk premia, Government debt, DSGE models, Nonlinear solution methods

Suggested Citation

Corhay, Alexandre and Kind, Thilo and Kung, Howard and Morales, Gonzalo, Discount Rates, Debt Maturity, and the Fiscal Theory (July 22, 2021). Available at SSRN: https://ssrn.com/abstract=3891603 or http://dx.doi.org/10.2139/ssrn.3891603

Alexandre Corhay (Contact Author)

University of Toronto - Rotman School of Management ( email )

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

Thilo Kind

London Business School ( email )

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

Howard Kung

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
15
Abstract Views
101
PlumX Metrics