European Business Schools Librarian's Group

HEC Research Papers Series,
HEC Paris

No 1532: Fiscal Dominance: Implications for Bond Markets and Central Banking

Jean Barthelemy (), Eric Mengus () and Guillaume Plantin ()
Additional contact information
Jean Barthelemy: Banque de France
Eric Mengus: HEC Paris
Guillaume Plantin: Sciences Po

Abstract: Fiscal dominance refers to situations in which fiscal policy imposes restrictions on monetary policy. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government, the central bank and the bond markets.

Keywords: Fiscal dominance; game of chicken; Fiscal-Monetary Interactions

JEL-codes: E31; E52; E63; H63

30 pages, November 8, 2024

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