An Equilibrium Approach to the Term Structure of Interest rates with the Interaction between Monetary and Fiscal Policy

Marzo, Massimiliano (2001) An Equilibrium Approach to the Term Structure of Interest rates with the Interaction between Monetary and Fiscal Policy. Bologna: Dipartimento di Scienze economiche DSE, p. 39. DOI 10.6092/unibo/amsacta/4889. In: Quaderni - Working Paper DSE (410). ISSN 2282-6483.
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Abstract

In this paper I jointly derive the stochastic process of the price level, the inflation rate, thenominal and real term structures, as function of monetary, fiscal and technological parameters within a general equilibrium framework. The novelty of the present approach is given by the possibility of obtaining closed form solutions for all the variables and by the explicit design of fiscal policy as a crucial parameter in addition to monetary policy. Thus, as stated from FTPL, inflation is not uniquely a monetary phoenomenon, but also fiscal policy plays a crucial role in determining the position of the nominal spot curve and term structure of intererest rates. The risky factors of nominal and real term structures depend upon di¤erent factors, when the utility function is strongly separable in both output and real money balances. If not, monetary and fiscal parameters affect only nominal equilibrium. The principal realtionships derived of the model are then simulated for different values of policy parameters. The main conclusion is that fiscal policy parameters play a crucial role in term structure patterns, as recently observed by the performance of nominal rates for some countries (like Italy, fore example) after having joined the EMU.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Marzo, Massimiliano
Keywords
Fiscal Policy Rule, Price Level, Inflation, Nominal Term Structure.
Subjects
ISSN
2282-6483
DOI
Deposit date
17 Mar 2016 10:28
Last modified
09 Jun 2016 09:43
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