Monetary Policy and Government Debt
Abstract
We study how the level of government debt affects the effectiveness of monetary policy, that is, the elasticity of economic aggregates to interest rate changes. We build a New Keynesian model where fiscal policy is non-Ricardian and government debt is risk-free. Wealth effects generated by government bonds weaken the transmission of monetary policy to output. Using data on private ownership of U.S. public debt, we find that when the debt-to-GDP ratio is one standard deviation above its mean, the response of industrial production and unemployment to a monetary shock decreases by 0.75pp and 0.1pp, respectively, out to a 3-year~horizon.
Type
Publication
Journal of Money, Credit, and Banking
Authors
Ethan Feilich
(he/him)
Economist
I am an economist in the Office of Economic Policy at the U.S. Department of the Treasury. My research explores the dynamic interplay between macroeconomic policy and household heterogeneity, examining how policy shapes wealth and income distributions and how these disparities, in turn, influence aggregate economic outcomes and the transmission of policy.
Views expressed are my own and do not necessarily represent official positions or policy of the U.S. Department of the Treasury.