Scandinavian Working Papers in Economics
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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 2008:6:
A Continuous-Time Model of the Term Structure of Interest Rates with Fiscal-Monetary Policy Interactions

Massimiliano Marzo (), 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: D90; G12; (follow links to similar papers)

27 pages, July 29, 2008

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