Journal of Finance Vol. 78 No. 6 2023

Discount Rates, Debt Maturity, and the Fiscal Theory

Alexandre Corhay^{1,2,3,4,5,6,7}; Thilo Kind^{1,2,3,4,5,6,7}; Howard Kung^{1,2,3,4,5,6,7}; GONZALO MORALES⁸

¹ Northwestern University · ² University of Southern California · ³ Center for Economic and Policy Research · ⁴ University of Toronto · ⁵ Leibniz Institute for Financial Research SAFE · ⁶ London Business School · ⁷ Federal Reserve Bank of Chicago · ⁸ Ifo Institute for Economic Research

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.

DOI

10.1111/jofi.13282

Volume

78

Issue

6

Pages

3561-3620

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓