Essays on the coordination of debt management and monetary policy

The dissertation studies coordinating debt management with monetary policy. The analysis assumes that the Fed has superior information on future inflation. Policy coordination requires the Fed to inform the Treasury about its inflation target.; Assuming that the Treasury seeks to reduce the interest cost of debt, the Treasury would issue short-term (or retire long-term) debt if the Fed raised interest rates to reduce inflation. The change in term to maturity would show a strong belief by the Treasury that interest rates are temporarily high while the Fed is fighting inflation.; The first essay employs a debt management game to study how the Treasury may be able to use debt management to penalize the Fed for cheating on inflation-fighting pledges. Assuming Treasury independence, the study finds that the Treasury should shorten average maturity if the Fed cheats. This debt management signal from the Treasury would cause agents to increase their inflation forecasts and thus reduce the output-stimulating benefits of expansionary monetary policy. By increasing average maturity, the Treasury imposes a cost on the Fed for cheating, thus making the Fed less likely to cheat and improving credibility.; The second essay seeks to quantify the impact of policy coordination on output and prices. The first step is to estimate a VAR. The second step is to realize that if debt management signals contractionary monetary policy, then agents would lower their inflation forecasts and set lower future prices. The third step is to reestimate the CPI equation subject to a restriction on the coefficient of the first lag of average maturity. Greater coefficient values imply that agents are more sensitive to average maturity signals in setting future prices, indicating that the signals are more credible. Orthogonalized impulse-response functions and sacrifice-ratio simulations show that, even for cases where agents do not view the signals as being credible, coordinating debt management with monetary policy reduces both inflation and the output loss commonly associated with disinflationary monetary policy. Also, the greater is credibility, the higher is output and the lower is inflation.