QE in the fiscal theory: a risk-based view

Subject

Finance

Publishing details

Social Sciences Research Network

Authors / Editors

Corhay A; Kung H; Morales G

Biographies

Publication Year

2017

Abstract

This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations under fiscal stress in a New Keynesian model with endogenous bond risk premia. Open market debt maturity operations are non-neutral when the slope of the nominal yield curve is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure dampens (amplifies) the stimulative effects of quantitative easing policies.

Series Number

Rotman School of Management Working Paper 2981085

Series

Social Sciences Research Network