Term structure of interest rates with monetary and fiscal policy

In this paper I jointly derive the stochastic process of the price level, the inflation rate, the nominal and real term structures, as function of monetary, fiscal and technological parameters within a general equilibrium framework. The novelty of the present approach is given by the possibility of obtaining closed form solutions for all the variables and by the explicit design of fiscal policy as crucial parameter in addition to monetary policy. Thus, inflation is not uniquely a monetary phenomen, but also fiscal policy plays a crucial role in determining the position of the nominal spot rate curve and the term structure of interest rates. The riskiness of the nominal and real term structures is a function of different sources of risk, depending whether the utility function is strongly separable or not in consumption and real money balances. With a strongly separable utility monetary and fiscal parameters affect only nominal equilibrium.