Long-Term Government Debt and Monetary Policy Transmission in HANK Models

This paper considers the effect of long-term government debt on the transmission of monetary policy in heterogeneous-agent New Keynesian (HANK) models. The interactions between the maturity composition of government debt and the design of fiscal policy are important determinants of the aggregate and distributional effects of monetary policy. When the maturity of government debt is longer, the fiscal effects of monetary policy can serve to dampen the fall in consumption following a monetary policy contraction. This dampening is most significant when the fiscal rule is more responsive to the level of government debt, and when the tax system is less progressive.