Indexed versus nominal government debt under inflation and price-level targeting
Indexed versus nominal government debt under inflation and price-level targeting
This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a relatively better store of value. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. A key finding from a policy perspective is that indexation has implications for welfare comparisons of IT and PT.
126-145
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
21 August 2014
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
Hatcher, Michael
(2014)
Indexed versus nominal government debt under inflation and price-level targeting.
Journal of Economic Dynamics and Control, 45, .
(doi:10.1016/j.jedc.2014.05.020).
Abstract
This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a relatively better store of value. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. A key finding from a policy perspective is that indexation has implications for welfare comparisons of IT and PT.
Text
Indexed versus nominal government debt_JEDC_revision.pdf
- Accepted Manuscript
More information
Accepted/In Press date: 6 June 2014
e-pub ahead of print date: 6 June 2014
Published date: 21 August 2014
Organisations:
Economics
Identifiers
Local EPrints ID: 368504
URI: http://eprints.soton.ac.uk/id/eprint/368504
ISSN: 0165-1889
PURE UUID: 02e99479-2491-4632-9af3-b786ce1f8643
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Date deposited: 02 Sep 2014 16:29
Last modified: 15 Mar 2024 03:50
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