Indexed Debt Research Articles

Sovereign Debt: Indexation and Maturity

In this paper we review the literature on sovereign debt with particular emphasis on indexation and maturity and the main policy proposals related to these topics. We also advance some implications derived from our work. In Alfaro and Kanczuk (2005a, b, c), we modeled sovereign debt as a contingent claim following the framework developed by Grossman and Van Huyck (1988). Our framework, however, recognizes that contingent debt might be associated with incentive problems. Applying this framework to the study of the sustainability of sovereign debt, the tradeoff between nominal and indexed debt, and the optimal debt maturity, we find some of the proposals advanced in the literature regarding lengthening debt maturity and issuing nominal debt to be unsustainable in emerging (volatile) economies.

Public Debt Management and Macroeconomic Stability: An Overview

Recent research suggests that management of the public sector debt can have important effects on a country macroeconomic performance. This Public debt management and macroeconomic stability article provides an overview of the factors that the recent literature has identified as important in determining the optimal composition of the public debt. Based on this analysis, it attempts to establish general guidelines for public debt management in emerging economies. To retain market access and promote domestic financial market development, governments should generally finance themselves at market rates using a wide variety of securities. Beyond this general principle, the optimal composition of the public debt involves a tradeoff between enhancing the government anti-inflationary credibility and reducing the vulnerability of its budget to macroeconomic shocks. Consequently, the optimal composition of the debt depends on a country circumstances. Debt should be heavily weighted toward long-term nominal securities for governments that have anti-inflationary credibility and toward long-term indexed debt for those that do not.

House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

I develop and estimate a monetary business cycle model with nominal loans and collateral constraints tied to housing values. Demand shocks move housing and nominal prices in the same direction, and are amplified and propagated over time. The financial accelerator is not uniform: nominal debt dampens supply shocks, stabilizing the economy under interest rate control. Structural estimation supports two key model features: collateral effects dramatically improve the response of aggregate demand to housing price shocks; and nominal debt improves the sluggish response of output to inflation surprises. Finally, policy evaluation considers the role of house prices and debt indexation in affecting monetary policy trade-offs.

A novel procedure for evaluating gingival perfusion status using laser‐Doppler flowmetry

To systematize a procedure that allows one to characterize the perfusion response pattern of attached gingiva to the topical and transitory compression of alveolar mucose, using laser-Doppler flowmetry. A cross-sectional study was carried out, in 20 healthy adult subjects of either sex, with teeth in antero-mandibular sextant but without periodontitis at the lower left lateral incisor (LLLI). Sample was selected by convenience non-probability sampling. Gingival perfusion was evaluated at labial LLLI attached gingiva using a specially designed gingival tray. Two perfusion recordings were carried out 5 min. apart, each one consisting of a 40 s control phase, a 22 s compression phase and a 40 s post-compression phase. During compression phase, LLLI alveolar mucose was compressed with a wood-mounted cotton swab until the perfusion decreased to about 1/5 of its control perfusion value. Integrated primary basal flow (IPBF) during control phase was of 14,210+/-1075 perfusion units (PU), whereas integrated flow during compression phase was of 1651+/-202 PU (p<0.05). After compression was released, integrated total secondary real flow was 13,322+/-1513 PU (p<0.05) which represented a 91.3+/-3.8% of IPBF. Gingival compression propitiated an induced flow debt (IFD) of 6478+/-781 PU, which increased in 980+/-482 PU after compression was released, representing 18% of the IFD (Debt index). A hypoaemic response in reaction to topical and transitory LLLI alveolar mucose compression was observed. Debt index and the ITSRF% are reproducible indices of microvascular perfusion response whose validation under pathological circumstances remains to be evaluated.

Public Debt Indexation and Denomination, the Case of Brazil: A Comment

In this work I analyze the model proposed by Goldfajn (2000) to study the choice of the denomination of the public debt. The main purpose of the analysis is pointing out possible reasons why new em pirical evidence provided by Bevilaqua, Garcia and Nechio (2004), regarding a more recent time period, finds a lower empirical support to the model. I also provide a measure of the overestimation of the welfare gains of hedging the debt led by the simplified time frame of the model. Assuming a time-preference parameter of 0.9, for instance, welfare gains associated with a hedge to the debt that reduces to a half a once-for-all 20%-of-GDP shock to government spending run around 1.43% of GDP under the no-tax-smoothing structure of the model. Under a Ramsey allocation, though, welfare gains amount to just around 0.05% of GDP.

Optimal Debt Management with a Stability and Growth Pact

The Stability and Growth Pact introduces deficit stabilization as a new interesting objective of debt management. The interest payments on public debt may serve as an important buffer against the budget consequences of cyclical downturns and unexpected deflation. The optimal debt composition depends on the correlations between interest rates, output and inflation. Estimated correlations for the period 1960-1988 and the implied debt compositions provide benchmarks for implications regarding the EMU. The paper explores how relevant correlations between output, inflation and interest rates may have changed with the shift in the monetary policy regime and thus how the debt composition, which stabilizes the dificit, has changed. A longer maturity structure of conventional debt is optimal if the ECB places a lower weight on output stabilization then the national monetary authorities and if EMU member states are hit by asymmetric shocks. Short term conventional debt should instead be issued by countries which experience a relatively higher output and inflation uncertainty and a lower sensitivity of aggregate demand to interest-rate changes. The optimal share of inflation indexed debt is largest in a strict inflation targeting regime; the lower the weight that the ECB assigns to output stabilization, the more attractive is inflation indexation for deficit stabilization.

Ambiguity aversion and the absence of indexed debt

Following the seminal works of Schmeidler (1989), Gilboa and Schmeidler (1989), roughly put, an agent’s subjective beliefs are said to be ambiguous if the beliefs may not be represented by a unique probability distribution, in the standard Bayesian fashion, but instead by a set of probabilities. An ambiguity averse decision maker evaluates an act by the minimum expected value that may be associated with it.

The World Economy

Global inflationary pressures have been building over the last 12 months. These rising pressures reflect emergence from the global recession of 2001–2 and fiscal laxity in several of the world's largest economies, as well as a number of temporary factors such as rising commodity prices and indirect tax increases. Inflation expectations, as reflected by yield differences between indexed and ordinary government debt, have edged up in the US, the Euro Area and the UK, as illustrated in Chart 1. US and UK inflation expectations are about 0.8 percentage points higher than at the start of 2003, while Euro Area inflation expectations have risen by about 0.4 percentage points. Our inflation projections for the major economies are reported in Table 1. We forecast an acceleration of inflation in the US, Germany, France and the UK this year relative to 2003, and expect deflation in Japan to come to an end from the middle of 2004. Stronger inflationary pressures in the US partly reflect the positive output gap, while output gaps in Canada and the Euro Area are expected to remain negative until the end of 2005 and 2006, respectively. Our output gap estimates are illustrated in Chart 2.

Interactions between monetary and fiscal policy under flexible exchange rates

We examine fiscal and monetary policy interactions by developing a two-country open-economy model under flexible exchange rates, where overlapping generations of consumers supply labour to imperfectly competitive firms that change their prices infrequently. We show in this context that the implications of lax fiscal policy in country A are significant for country B. Determinacy can be ensured by adopting a ‘passive’ monetary policy in either country A or country B. In both cases, however, lack of fiscal feedback in country A will imply that fiscal shocks have significant macroeconomic consequences for both countries. We examine how the size of these spillovers is influenced by the degree of debt indexation. We also show that the fiscal response required to support an active monetary policy is greater when consumers have finite lives and that the characterisation of ‘active’ and ‘passive’ regimes does not depend on whether or not debt is indexed.

Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.

Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.

International Market Implications of Declining Treasury Debt

This article argues that international financial markets could take de- clining net U.S. Treasury debt in stride under normal circumstances. First, declining net U.S. government debt does not force U.S. Trea- suries to be retired. Instead, Asia-Pacific governments have estab- lished or sustained government securities markets despite fiscal surpluses. Second, developments in the U.S. dollar money market show that fixed income markets can generate their own private benchmarks. Finally, the world's central banks are well along in shifting their portfolios away from U.S. Treasury to other instru- ments. Questions remain about market functioning under stress with- out the typhoon harbor that Treasury securities have provided. IN ALTERING THE OUTLOOK for the U.S. budget, the horrors of September 2001 have provided an opportunity for reasoned debate about policy in the event that chronic surpluses return. Prior to September, paying down the debt had almost come to define good policy rather than to be a consequence of good policy. The previous discussion had confused three separate, or at least separable, issues. First, there was a macroeconomic question about the appropriate path of underlying fiscal surpluses and deficits. Second, there was a financial question of the optimal Treasury debt policy, that is, the appropriate path of Treasury debt outstanding and its mix between straight and indexed debt and its maturity profile. Finally, there were financial and governance questions regarding the appropriate financial assets for the U.S. official sector to accumulate, whether the Treasury, the Federal Reserve, and/or some new Asset Management Corporation (AMCO). Working in the Asia-Pacific region, which contains some of the financially wealth- iest governments on earth, it is appropriate for me to focus on the international as- pects of these questions. The Asia-Pacific region offers examples of governments with chronic surpluses that nevertheless have government securities markets and of governments that are paying down their net debt while maintaining their government securities markets.

Public debt indexation and denomination with an independent central bank

This paper examines the interaction between public debt management and the design of monetary institutions. The analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation-indexed debt. If delegation of monetary policy is viable, the optimal policy is to issue nominal debt. This increases the sensitivity of taxes and output to unexpected inflation, thus minimizing the inflation needed to offset supply shocks. Evidence on central bank independence, debt composition and output variability suggests that the normative argument has some positive content.

Currency Crisis in Turkey, February 2001

The latest financial crisis in Turkey during February 2001 was the most recent in a series of crises the country has experienced in recent years. In order to avoid, or at least dampen the effects of a financial crisis, it is crucial to have some type of early warning system. In an effort to help construct such a system, this study identifies the changes in the consumer price index and internal debt, as well as the ratio of the official exchange rate to the over-the-counter exchange rate, as factors that preceded the currency crisis of February 2001.

Public Debt Indexation and Denomination with and Independent Central Bank

This paper examines the interaction between public debt management and the design of monetary institutions. The analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation-indexed debt. If delegation of monetary policy is viable, the optimal policy is to issue conventional debt. This increases the sensitivity of taxes and output to unexpected inflation, thus minimizing the inflation needed to offset supply shocks. Evidence on central bank independence, debt composition and output variability suggests that the normative argument has some positive content.

THE SLEEP OF HEALTHY PEOPLE—A DIARY STUDY

To provide baseline data for various research studies at the University of Pittsburgh over a 10-year period, 266 healthy subjects (144 male, 122 female, aged 20–50 years) meeting certain criteria each completed a 14-night sleep diary. For each night, the diary allowed the subjective measurement of bedtime, wake time, time in bed (TIB), sleep efficiency, number of minutes of wake after sleep onset (WASO), alertness on awakening, and percentage of mornings needing an alarm (or a person functioning as one). Weeknight versus weekend night differences in TIB (TIBdiff), weekday alertness, and reliance on alarms were examined as possible indicators of sleep debt. In addition, general descriptive data were tabulated. On average, bedtimes were at 23:48 and wake times at 07:23, yielding a mean TIB of 7 hours 35 minutes. As expected, bedtimes and wake times were later on weekend nights than on weeknights. Bedtimes were 26 minutes later, wake times 53 minutes later, yielding a mean weekend TIB increase of 27 minutes. Overall, subjects perceived their sleep latency to be 10.5 minutes, reported an average of one awakening during the night (with an average of 6.4 minutes of WASO), had a diary sleep efficiency of 96.3%, and awoke with an alertness rating of 69.5%. These variables differed little between weeknight and weekend nights. Subjects used an alarm (or a person functioning as an alarm) on 60.9% nights overall, 68.3% on weeknights, 42.5% on weekends. When TIBdiff was used as an estimate of sleep debt (comparing subjects with TIBdiff >75 minutes with those with a TIBdiff < 30 minutes), the group with more “catch-up sleep” on weekends had shorter weeknight TIB durations (by about 24 minutes) and relied more on an alarm for weekday waking (by about 22%), indicating the possible utility of these variables as sleep debt indices. (Chronobiology International, 17(1), 49–60, 2000)

Public debt indexation and denomination: the case of Brazil

The paper models the optimal debt management strategy of the public sector when issuing nominal, price-level-indexed and foreign denominated debt securities. The model predicts that the variance of inflation, the size of the public debt, the variance of the real exchange rate, and the correlation of inflation with public expenditures are the main determinants of public debt management. Using this framework the paper analyses the Brazilian experience with indexed debt in the last decade. In particular, it explains the large increase of indexed public debt in Brazil prior to the 1994 Real plan and, thereafter, the steady decline in its use. Copyright © 2000 John Wiley & Sons, Ltd.

Policy Watch: The Introduction of Indexed Government Debt in the United States

This article describes the early phases of the development of the market for indexed government debt in the United States. The first such bonds were issued in 1997--one set with a maturity of ten years, the other with a maturity of five years. In the wake of the Treasury issuance, several non-Treasury borrowers have issued indexed debt and several new index-linked products for retail customers have been introduced. As expected, the new indexed notes have 'outperformed' conventional nominal notes in the secondary markets for Treasury debt when bad news has become available about inflation and conversely.

A Modest Proposal for Structuring Public Debt

This paper proposes structuring public debt using considerations of robustness rather than strict optimality. Our proposal minimizes, over the infinite future, the conditional uncertainty surrounding public financing requirements. We estimate holding-period returns and market values on nominal and indexed UK government debt for a range of maturities, and derive the desired debt structures, according our proposal, that would be implied by the historical data. Although implications are not precise in all directions, given the historical UK data, our proposal leads to the government strongly favoring index-linked debt over conventionals.

Public Debt Indexation and Denomination: The Case of Brazil

The paper models the optimal debt management strategy of the public sector when issuing nominal, price-level-indexed and foreign-denominated debt securities. The model predicts that the variance of inflation, the size of the public debt, the variance of the real exchange rate, and the correlation of inflation with public expenditures are the main determinants of public debt management. Using this framework, the paper analyzes the Brazilian experience with indexed debt in the last decade. In particular, it explains the large increase of indexed public debt in Brazil prior to the 1994 Real plan and, thereafter, the steady decline in its use.