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Max Alston on Government debt duration and monetary policy transmission

Max Alston
December 5, 2023
12:15 pm - 1:15 pm
Student Research Workshop

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Room 108

Changes in interest rates have immediate effects on government budgets through an increase in interest costs on debt. In turn, fiscal adjustments in response to interest rate changes can be a transmission channel for monetary policy. Using high frequency identification of monetary policy shocks, I estimate a fiscal rule for the US. I find that monetary policy shocks are followed by a reduction in spending and an increase in debt. Through a two agent New Keynesian model, I clarify how this channel depends on the maturity profile of government debt and show how unconventional monetary policies that shorten the maturity profile of government debt amplify the fiscal channel. In the model, my empirical estimates of the US government’s fiscal response imply that quantitative easing has significantly amplified monetary policy transmission through the fiscal channel.