Discount Rates, Debt Maturity, and the Fiscal Theory

77 Pages Posted: 7 Jun 2017 Last revised: 31 Dec 2022

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

Date Written: July 21, 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: Fiscal Theory of the Price Level, Government Debt, Maturity Structure, Inflation, Bond Risk Premia, Markov-Switching DSGE, Nonlinear Solution Methods, Time-Varying Risk Premia

Suggested Citation

Corhay, Alexandre and Kind, Thilo and Kung, Howard and Morales, Gonzalo, Discount Rates, Debt Maturity, and the Fiscal Theory (July 21, 2021). Rotman School of Management Working Paper No. 2981085, Available at SSRN: https://ssrn.com/abstract=2981085 or http://dx.doi.org/10.2139/ssrn.2981085

Alexandre Corhay

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 (Contact Author)

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

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