Learning the fiscal theory of the price level: Some consequences of debt-management policy |
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Authors: | Stefano Eusepi Bruce Preston |
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Institution: | aFederal Reserve Bank of New York, United States;bDepartment of Economics, Columbia University, 420 West 118th St., New York, NY 10027, United States;cResearch School of Economics, Australian National University, Australia |
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Abstract: | This paper examines the consequences of the scale and composition of the public debt in policy regimes in which monetary policy is ‘passive’ and fiscal policy ‘active’. This configuration of policy is argued to be of both historical and contemporary interest, in economies such as the US and Japan. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability for a range of policies specified as simple rules. However, interest-rate pegs combined with active fiscal policies almost always ensure macroeconomic stability. This suggests that in periods where the zero lower bound on nominal interest rates is a relevant constraint on policy design, a switch in fiscal regime is desirable. |
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Keywords: | JEL Classification: E32 D83 D84 |
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