When government bonds carry a positive convenience yield, meaning they are valued for things other than their pecuniary return, counter-cyclical fiscal policy becomes more successful in stabilizing output. This is because the convenience yield implies a positive link between government bond holdings and private consumption which counter-cyclical fiscal policy effectively exploits. While governments face a tradeoff between output stabilization and debt sustainability, the convenience yield renders this tradeoff more favorable. Optimal fiscal policy under a positive convenience yield prescribes a large weight on output stabilization and a small weight on debt stabilization.
Author: | Dennis, Bonam |
Volume: | 2021.06 |
Publisher: | INFER |
Year: | 2021 |
No. of pages: | 3 |
Category: |