The Econometric Society An International Society for the Advancement of Economic Theory in its Relation to Statistics and Mathematics
Home Contacts
Econometrica

New Journals

Econometrica
Editorial Board
Journal News

Monograph Series

January 2001 - Volume 69 Issue 1 Page 69 - 116


p.69


Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level

John H. Cochrane

Abstract

The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze long-term debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long-term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short-term debt. The maturity structure of outstanding debt acts as a “budget constraint” determining which periods’ price levels the government can affect by debt variation alone. In addition, debt policy—the expected pattern of future state-contingent debt sales, repurchases and redemptions—matters crucially for the effects of a debt operation. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which long-term debt helps to stabilize inflation. I also find that the optimal policy produces time series that are similar to U.S. surplus and debt time series. To understand the data, I must assume that debt policy offsets the inflationary impact of cyclical surplus shocks, rather than causing price level disturbances by policy-induced shocks. Shifting the objective from price level variance to inflation variance, the optimal policy produces much less volatile inflation at the cost of a unit root in the price level; this is consistent with the stabilization of U.S. inflation after the gold standard was abandoned.


Full content Login                                    

Note: to view the fulltext of the article, please login first and then click the "full content" button. If you are based at a subscribing Institution or Library or if you have a separate access to JSTOR/Wiley Online Library please click on the "Institutional access" button.
Prev | All Articles | Next
Go to top
Membership



Email me my password
Join/Renew
Change your address
Register for password
Require login:
Amend your profile
E-mail Alerting
The Society
About the Society
Society News
Society Reports
Officers
Fellows
Members
Regions
Meetings
Future Meetings
Past Meetings
Meeting Announcements
Google
web this site
   
Wiley-Blackwell
Site created and maintained by Wiley-Blackwell.
Comments? Contact customsiteshelp@wiley.com
To view our Privacy Policy, please click here.