## Is the quantity of government debt a constraint for monetary policy?, Issues 2007-2062This paper derives an interest rate rule for monetary policy in which the interest rate response of the central bank toward an increase in expected inflation falls as debts increase beyond a certain threshold level. A debt-constrained interest rate rule and the threshold level of debt are jointly estimated for Canada during the first decade of its inflation targeting regime of the 1990s. There are three main findings of this paper. First, a high government debt could constrain monetary policy if government spending-rather than taxes-is expected to adjust in future in line with debt service costs. The 'constraint' operates through an altered policy transmission mechanism through changes in the IS curve. Second, the effects of the debt-constraint on monetary policy are quite different during booms and recessions. Third, empirical estimates show that Canadian monetary policy might have been constrained by a high government debt-GDP ratio during the 1990s. Policy was less loose than what inflation indicators called for. |

### What people are saying - Write a review

We haven't found any reviews in the usual places.

### Contents

Introduction | 3 |

Joint Estimation of the Threshold Level of Debt and Interest Rate Rulethe Case | 12 |

Appendices | 19 |

Copyright | |

1 other sections not shown

### Other editions - View all

Is the Quantity of Government Debt a Constraint for Monetary Policy? Ms. Srobona Mitra Limited preview - 2007 |

Is the Quantity of Government Debt a Constraint for ..., Issues 2007-2062 Srobona Mitra Limited preview - 2007 |

### Common terms and phrases

adjusted assumed back debt shocks bank's central bank Clarida consumption Euler equation core inflation rate debt and monetary debt service costs debt shocks entirely debt-constrained models debt-constraint debts are high derived dummy variable error term exogenous expected future expected real interest expected short-term real Federal Funds Rate fiscal authorities fiscal policy future expected output future expected real future expected short-term government consumption high and growing high debt levels high government debt higher increase in expected inflation targeting regime interest rate response interest rate rule J-statistic J.Gali and M.Gertler Leeper level of debt link between debt long-term indexed bond loss function monetary authorities Monetary Policy Rules nominal interest rate objective function optimal interest rate output gap overnight rate p-value p<pa paper percent of GDP percentage point increase Phillips Curve policy maker real interest rate right hand side rule under discretionary seigniorage short-term interest rate short-term real interest taxes Taylor rule