FTPL and the Maturity Structure of Government Debt in the New-Keynesian Model
54 Pages Posted: 20 Jul 2022 Last revised: 15 Jul 2023
Date Written: July 1, 2022
In this paper, we revisit the fiscal theory of the price level (FTPL) within the New Keynesian (NK) model. We show in which cases the average maturity of government debt matters for the transmission of policy shocks. The central task of this paper is to shed light on the theoretical predictions of the maturity structure on macro dynamics with an emphasis on model-implied expectations. In particular, we address the transmission channels of monetary and fiscal policy shocks on the interest rate and inflation dynamics. Our results illustrate the role of the maturity of existing debt in the wake of skyrocketing debt-to-GDP ratios and increasing government expenditures. We highlight our results by quantifying the effects of the large-scale US fiscal packages (CARES) and predict a surge in inflation if the deficits are not sufficiently backed by future surpluses.
Keywords: NK models, FTPL, Government debt, Maturity structure, CARES
JEL Classification: E32, E12, C61
Suggested Citation: Suggested Citation