Authors: Stefano Eusepi and Bruce Preston
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Authors: Stefano Eusepi and Bruce Preston
This paper examines how the scale and composition of public debt can affect economies that implement a combination of "passive" monetary policy and "active" fiscal policy. This policy configuration is argued to be of both historical and contemporary interest in the cases of the U.S. and Japanese economies. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability under a range of policies specified as simple rules. However, interest rate pegs in combination with active fiscal policies almost always ensure macroeconomic stability. This finding suggests that in periods where the zero lower bound on nominal interest rates is a relevant constraint on policy design, a switch in fiscal regime is desirable.