Discount Rates,Debt Maturity,and the Fiscal Theory |
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| Authors: | ALEXANDRE CORHAY THILO KIND HOWARD KUNG GONZALO MORALES |
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| Affiliation: | 1. Correspondence: Howard Kung, London Business School, Regent's Park, Sussex Place, London NWI 4SA, UK;2. e-mail: hkung@london.edu.;3. Alexandre Corhay is at the Rotman School of Management, University of Toronto. Thilo Kind is at the Leibniz Institute for Financial Research SAFE. Howard Kung is at the London Business School and CEPR. Gonzalo Morales is at the Bank of Canada. We also thank Marco Bassetto;4. Frederico Belo;5. Luigi Bocola;6. Francesco Bianchi;7. Ian Dew-Becker;8. Mike Chernov;9. John Cochrane;10. Greg Duffee;11. Francisco Gomes;12. Francois Gourio;13. Christopher Hennessy;14. Urban Jermann;15. Tim Landvoight;16. Leonardo Melosi;17. Francisco Palomino;18. Morten Ravn;19. Lukas Schmid;20. and seminar participants at the University of Minnesota, Northwestern University, Chicago Fed, University of Southern California, University of British Columbia, Universidad Carlos III, University College of London, London Business School, Vienna GSF, Chicago Booth Asset Pricing Conference, SED Meetings, CEPR European Summer Symposium, WFA Meetings, Sixth Macro Finance Society Workshop, EEA Meetings, Econometric Society Meetings, CAPR Workshop, and BI-SHoF Conference for helpful comments. Thilo Kind gratefully acknowledges research support from the Leibniz Institute for Financial Research SAFE. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Canada. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose. |
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| 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 expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory depend directly on the conditional nominal term premium, giving rise to an optimal debt-maturity policy that is state-dependent. In a calibrated macrofinance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism. |
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