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Fiscal Dominance: Implications for Bond Markets and Central Banking

Author

Listed:
  • Barthelemy, Jean

    (Banque de France)

  • Mengus, Eric

    (HEC Paris)

  • Plantin, Guillaume

    (Sciences Po)

Abstract

Fiscal dominance refers to situations in which fiscal policy imposes restrictions on monetary policy. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government, the central bank and the bond markets.

Suggested Citation

  • Barthelemy, Jean & Mengus, Eric & Plantin, Guillaume, 2024. "Fiscal Dominance: Implications for Bond Markets and Central Banking," HEC Research Papers Series 1532, HEC Paris.
    • Handle: RePEc:ebg:heccah:1532
    DOI: 10.2139/ssrn.4989409
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    More about this item

    Keywords

    Fiscal dominance; game of chicken; Fiscal-Monetary Interactions;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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