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. DOI 10.6092/unibo/amsacta/669.
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Abstract

In this paper I jointly derive the stochastic process of the price level, the inflation rate, the nominal 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 different 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 diffrent 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 perfmance 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
DOI
Deposit date
17 Jun 2004
Last modified
17 Feb 2016 14:00
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