Research Discussion Papers, Bank of Finland
A continuous-time model of the term structure of interest rates with fiscal-monetary policy interactions
(), Silvia Romagnoli
() and Paolo Zagaglia
Abstract: We study the term structure implications of the fiscal
theory of price level determination. We introduce the intertemporal budget
constraint of the government in a general equilibrium model in continuous
time. Fiscal policy is set according to a simple rule whereby taxes react
proportionally to real debt. We show how to solve for the prices of real
and nominal zero coupon bonds.
Keywords: bond pricing; fiscal policy; mathematical methods; (follow links to similar papers)
JEL-Codes: D91; E43; E61; G12; (follow links to similar papers)
35 pages, October 17, 2008
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