FTPL and the Maturity Structure of Government Debt in the New Keynesian Model

56 Pages Posted: 20 Jul 2022

See all articles by Max Ole Liemen

Max Ole Liemen

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: 2022

Abstract

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: E320, E120, C610

Suggested Citation

Liemen, Max Ole and Posch, Olaf, FTPL and the Maturity Structure of Government Debt in the New Keynesian Model (2022). CESifo Working Paper No. 9840, Available at SSRN: https://ssrn.com/abstract=4167443 or http://dx.doi.org/10.2139/ssrn.4167443

Max Ole Liemen (Contact Author)

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Olaf Posch

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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