Monetary policy, bond returns and debt dynamics

Using the government׳s intertemporal budget constraint, we quantify the contribution of returns paid on the U.S. government׳s debt portfolio to the evolution of the debt-to-GDP ratio. We show that announcements of unconventional monetary policy measures by the Federal Reserve between 2008.IV and 201...

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Bibliographic Details
Published in:Journal of monetary economics 2015-07, Vol.73, p.119-136
Main Authors: Berndt, Antje, Yeltekin, Şevin
Format: Article
Language:English
Subjects:
Bond market
Bond returns
Debt
Debt dynamics
Deficit financing
Economic stabilization
Federal Reserve monetary policy
Government bonds
Gross domestic product
Macroeconomics
Monetary policy
Portfolio selection
Predictability
Studies
U.S.A
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Summary:Using the government׳s intertemporal budget constraint, we quantify the contribution of returns paid on the U.S. government׳s debt portfolio to the evolution of the debt-to-GDP ratio. We show that announcements of unconventional monetary policy measures by the Federal Reserve between 2008.IV and 2012, as a part of macroeconomic stabilization, were associated with a sizable increase in returns and debt-to-GDP ratios and contributed to fiscal imbalances. We use the Federal Reserve׳s portfolio composition as a proxy for unconventional monetary policy measures and show that it is significantly related to future bond returns and fiscal balances. •We measure the sources of debt-to-GDP growth in the U.S.•We quantify the contributions of bond returns to debt growth.•We use an event study to investigate effects of recent monetary policy on bond returns.•We show that unconventional monetary policy increased fiscal imbalances.•We use the Fed׳s asset portfolio to predict bond returns.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2015.03.001