A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt

Cochrane, John H.

doi:10.2139/ssrn.3531182

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A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt

Review of Economic Dynamics, Forthcoming

57 Pages Posted: 2 Mar 2020 Last revised: 21 Jun 2021

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: October 15, 2020

Abstract

I construct a simple model with sticky prices and interest rate targets, closed by fiscal theory of the price level with long-term debt and fiscal and monetary policy rules. Fiscal surpluses rise following deficits, to repay accumulated debt, but surpluses do not respond to all values of unexpected inflation and deflation. This specification avoids common puzzles and produces reasonable responses to fiscal and monetary policy shocks. It allows an easy translation of any new-Keynesian model, and it allows one to study a whole sample with active fiscal policy.

Keywords: fiscal theory, monetary policy, interest rate targets

JEL Classification: E3, E4, E5, E6

Suggested Citation: Suggested Citation

Cochrane, John H., A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt (October 15, 2020). Review of Economic Dynamics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3531182 or http://dx.doi.org/10.2139/ssrn.3531182