Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/310401 
Year of Publication: 
2024
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 207
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
We employ a new class of general equilibrium models with partially unfunded debt, as proposed in Bianchi et al. (2023), to study the relation between real interest rates and fiscal policy. Unfunded fiscal shocks generate a decline in real interest rates, while funded fiscal shocks cause an increase. We use the model to assess the historical path of real interest rates in the United States, traditionally a key driver of international real interest rates. We find that the fiscal real interest rate, defined as the component of the real rate related to unfunded fiscal shocks, accounts for a large share of the low-frequency movements in real interest rates. This suggests that fiscal policy will play a key role in determining the future path of real interest rates.
Subjects: 
Unfunded fiscal spending
persistent inflation
large public debt
inflation risk
shock-specific rule
JEL: 
E50
E62
E30
Document Type: 
Working Paper

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