Berentsen, Aleksander and Waller, Christopher. (2018) Liquidity premiums on government debt and the fiscal theory of the price level. Journal of Economic Dynamics and Control, 89. pp. 173-182.
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Official URL: https://edoc.unibas.ch/67244/
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Abstract
We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending. The price dynamics are driven solely by the liquidity premium on the debt.
| Faculties and Departments: | 06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Wirtschaftstheorie (Berentsen) |
|---|---|
| UniBasel Contributors: | Berentsen, Aleksander |
| Item Type: | Article, refereed |
| Article Subtype: | Research Article |
| Publisher: | Elsevier |
| ISSN: | 0165-1889 |
| e-ISSN: | 1879-1743 |
| Note: | Publication type according to Uni Basel Research Database: Journal article |
| Related URLs: | |
| Identification Number: | |
| Last Modified: | 27 Dec 2018 10:43 |
| Deposited On: | 27 Dec 2018 10:43 |
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