"Debt Maturity Management Under Fiscal-Monetary Non-Cooperation"

Joe Anderson 
University of Virginia 
October 2024 

The Treasury and Federal Reserve finance spending by utilizing U.S. debt markets to implement tax and inflation policies. The authorities internalize financing costs differently: raising taxes is costly for fiscal policymakers, while higher inflation is costly for central bankers. What determines the inflation/tax rate composition and supporting debt portfolio when operationally independent fiscal and monetary policy authorities behave non-cooperatively? I investigate fiscal and monetary non-cooperation under a maturity structure of nominal debt, varying commitment power at the institutional level. I define and study an economy’s debt dilution rate, which measures the relative amount of newly-issued short-term debt maturing alongside previously-issued long-term debt. Expected movements in this rate affect government indebtedness through the term structure, and surprise dilution provides current financing at the expense of future governments. I then examine how institutional bargaining outcomes determine an economy’s equilibrium financing mix. The theory rationalizes large post-GFC and post-COVID inflation differences with differences in fiscal bargaining power and inherited maturity structures.

"Regressive Effects of Regulation on Wages" with James Bailey and Diana Thomas, Public Choice, 2019, 180(1): 91-103