Economics Research Community Seminar – Professor Campbell Leith

Economics Research Community Seminar – Professor Campbell Leith

Title: Central Bank Independence, Government Debt and the Re-Normalization of Interest Rates

Date: 13 March 2024

Time: 13:30-14:30

Location: NUBS.2.03

If you would like to attend, please register using the following link:

Central Bank Independence, Government Debt and the Re-Normalization of Interest Rates

Speaker: Professor Campbell Leith, Professor of Macroeconomics, University of Glasgow

Abstract:

Central Bank Independence, Government Debt and the Re-Normalization of Interest Rates
Abstract: We develop a New Keynesian model augmented with a rich description of fiscal policy, including debt maturity structure, where two policy makers – an independent inflation-averse central bank and a (potentially) populist fiscal authority – interact strategically. Central bank independence improves inflation outcomes initially, but this results in reduced fiscal discipline, increasing debt. Eventually this leads to inflation lying above pre-independence levels. Introducing a ‘flight-to-safety’ regime, which suppresses the interest rates households require to hold government debt, and a conventional regime, where their time preferences return to normal, allows us to explore how changes in the natural rate can dramatically affect debt dynamics and inflation outcomes. Solving this model nonlinearly we find that we can explain the build up of government debt since the financial crisis and the subsequent emergence of significant inflation.