2008
25/2008
A continuous-time model of the term structure of interest rates with fiscal-monetary policy interactions
Author(s): Massimiliano Marzo – Silvia Romagnoli – Paolo Zagaglia
2008. 35 pages.
Publisher: Bank of Finland
ISBN 978-952-462-466-4 (Printed publication)
ISBN 978-952-462-467-1 (Web publication)
Search words: bond pricing, fiscal policy, mathematical methods, D9, G12, Massimiliano Marzo, Silvia RomagnoliPaolo Zagaglia
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.