A convenient truth: The convenience yield, low interest rates and implications for fiscal policy

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:
INFER Briefs