Abstract
AbstractWe study how the level of government debt affects the effectiveness of monetary policy, that is, the elasticity of economic aggregates to interest rate changes. We build a New Keynesian model where fiscal policy is non‐Ricardian and government debt is risk‐free. Wealth effects generated by government bonds weaken the transmission of monetary policy to output. Using data on private ownership of U.S. public debt, we find that when the debt‐to‐GDP ratio is one standard deviation above its mean, the response of industrial production and unemployment to a monetary shock decreases by 0.75pp and 0.1pp, respectively, out to a 3‐year horizon.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
