A Continuous-Time Model of the Term Structure of Interest Rates with Fiscal-Monetary Policy Interactions
38 Pages Posted: 17 Nov 2008
Date Written: October 24, 2008
We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.
Keywords: bond pricing, fiscal policy, term structure of interest rates
JEL Classification: D91, E43, E61, G12
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