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DEBT NONNEUTRALITY, POLICY INTERACTIONS, AND MACROECONOMIC STABILITY *
Author(s) -
Linnemann Ludger,
Schabert Andreas
Publication year - 2010
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2010.00588.x
Subject(s) - economics , monetary economics , ricardian equivalence , debt , inflation (cosmology) , monetary policy , volatility (finance) , interest rate , bond , government debt , fiscal policy , macroeconomics , econometrics , finance , physics , theoretical physics
We study the consequences of nonneutrality of government debt for macroeconomic stabilization policy in a sticky‐price model. Ricardian equivalence fails because debt has a negative impact on its rate of return and on private savings, which is induced by assuming transaction services of bonds. Under aggressive monetary policy regimes, macroeconomic fluctuations tend to be stabilized if nominal budget deficits are low. A smooth debt path limits inflation expectations, such that inflation variances can be reduced. Under a balanced budget policy, the central bank's output gap–inflation volatility trade‐off is improved relative to an environment where debt is neutral.