Essays on Fiscal and Monetary Policy Interactions in a World of Debt

This thesis develops theoretical macroeconomic models that contribute to the policy debate by providing new insights on fiscal-monetary interactions. It is composed of three chapters that emphasise the role of government debt (maturity) in shaping private sector's expectations and in stabilising the macroeconomy. The first chapter studies the importance of coordination between timeconsistent fiscal and monetary policy for macroeconomic outcomes during a liquidity trap episode.
It shows how central bank independence may imply a negative effect of government debt on consumption when the zero lower bound on interest rates is binding. In this context, long-lasting consolidation of debt turns out optimal to keep inflation below target at positive interest rates and lower interest rate expectations. The second chapter (co-authored with Boris Chafwehé and Rigas Oikonomou) explores the effectiveness of government debt maturity management as an additional margin to stabilise inflation in a world of fiscally dominated monetary policy.
A properly tailored maturity portfolio turns out to restore the efficacy of monetary policy under certain conditions about its (optimal) conduct. The third chapter offers a new insight on deficit-financed fiscal policy in a lowrate environment by considering liquidity traps that are caused by long-lasting shifts in expectations. Fiscal stimuli should include additional measures to contain debt accumulation in this case.