Convenience Yields, Inflation, and Growth

This paper investigates the implications of convenience yields for inflation and long-term growth in a model of the fiscal theory of the price level. The government’s debt valuation equation links convenience yields to inflation and taxation which affects the incentives to innovate. Convenience yields affect inflation through a standard seignor-age channel as well as through a novel pricing channel in the presence of long-term debt. The model is solved globally using novel machine-learning techniques to approx-imate the policy functions. The calibrated model shows that both channels worked to reduce the effectiveness of monetary policy in the last decade and that discount rates are crucial to understand the implications of seignorage revenue for the real economy. Convenience yields thus emerge as a crucial variable to rationalize secular stagnation combined with high values of debt-to-GDP.