Deakin University
Browse

File(s) under permanent embargo

Liquidity premiums on government debt and the fiscal theory of the price level

journal contribution
posted on 2018-04-01, 00:00 authored by A Berentsen, Christopher Waller
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.

History

Journal

Journal of economic dynamics and control

Volume

89

Pagination

173 - 182

Publisher

Elsevier

Location

Amsterdam, The Netherlands

ISSN

0165-1889

Language

eng

Publication classification

C Journal article; C1 Refereed article in a scholarly journal

Copyright notice

2018, Elsevier B.V.

Usage metrics

    Research Publications

    Categories

    No categories selected

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC