Working Paper: CEPR ID: DP14680
Authors: Markus Brunnermeier; Sebastian Merkel; Yuliy Sannikov
Abstract: This paper incorporates a bubble term in the standard FTPL equationto explain why countries with persistently negative primary surplusescan have a positively valued currency and low inflation. It also providesan example with closed-form solutions in which idiosyncratic riskon capital returns depresses the interest rate on government bondsbelow the economy's growth rate.
Keywords: monetary economics; fiscal policy
JEL Codes: E44; E52; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bubble (E32) | low inflation (E31) |
| real interest rate (r) < growth rate (g) (E43) | bubble (E32) |
| bubble (E32) | agents' wealth (L85) |
| agents' wealth (L85) | consumption demand (D12) |
| consumption demand (D12) | equilibrium price level (E30) |
| bubble (E32) | positively valued currency (F31) |
| negative primary surpluses (H62) | positively valued currency (F31) |
| bubble (E32) | fiscal dominance (E62) |