Fiscal-Monetary Interactions

Abstract

This paper examines how the maturity structure of sovereign debt shapes fiscal–monetary interactions in the United States. Using exogenous monetary policy shocks and nonlinear local projections, we show that debt maturity influences both the fiscal consequences of monetary tightening and its macroeconomic transmission. When the government relies more heavily on short-term debt, contractionary monetary policy shocks lead to large and persistent increases in public debt, more pronounced deteriorations in fiscal and financial conditions, and significantly larger declines in output, inflation, and private investment. These effects are substantially attenuated when debt maturity is longer. We rationalize the findings with a model in which a constrained intermediary holds both private credit and long-duration government debt and carries its bond portfolio at amortized cost. The intermediary’s opportunity cost of lending therefore depends in part on the yield locked in when the bonds were acquired, rather than solely on their one-period holding return, allowing sovereign debt maturity to directly influence the price of private credit.