Fiscal Policy with Bond in Utility and Inflation

Details

Supervisors

Oikonomou, Rigas

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation économétrie, à finalité approfondie

Abstract

I build up an economy with sticky price in which government can only issue non-state contingent short-term bond to hedge against government spending shock, while households have predilection for and can derive utility from holding short-term bond. The numerical analysis suggests that due to households' preference for the bond, the government issuing short term debt against a positive spending shock, gives rise to declining consumption and lowering asset price and thus higher yield rate, which in return, encourages households to save more and casts a doubt on debt sustainability of the government. However, with inflation shock, demand for short-term bond in real term decreases as the asset price goes up, which lowers the yield rate and hence slacks the debt sustainability problem.