Indexed Debt Research Articles

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.

Frequency Space Correlation between REITs and Capital Market Indices

Several studies have examined real estate investment trust (REIT) co-movement with stocks or bonds using traditional time domain based methods, such as linear regression or correlation. Results of these studies have produced inconsistent statistical model parameters. The erratic behavior of the models may have resulted from the different time periods in the studies, the REITs included in a study or the market indices. Another factor contributing to the variation of the models comes from the compression of cyclical information over a study’s time period by time domain based techniques. Cross-spectral analysis provides a frequency space method of examining the coherency (i.e., frequency space correlation) between two time series across all frequencies. This article contains an examination of the coherency between REITs and stock market indices and REITs and U.S. Treasury debt indices for the period 1989-95. Results of the coherency spectra show significant co-movement between REITs and stock market indices, while debt instruments show very few frequencies with significant coherency. Furthermore, phase spectra provide evidence of contemporaneous movement between REITs and stock indices at all frequencies.

Public Debt Indexation and Denomination: The Case of Brazil

The paper models the optimal debt management strategy of the public sector when issuing nominal, pricelevel 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 Real plan of 1994 and, thereafter, its steady decrease.

Debt Structure as an Indicator of Central Bank Independence

Kydland and Prescott [8] demonstrated that as a government with discretion often has an incentive to deviate from previously announced policy, the optimal policy under commitment is not time-consistent under discretion. Moreover, as the optimal time-consistent policy under discretion usually leads to a welfare loss relative to the optimal policy under commitment, social welfare can be increased by adopting a credible policy commitment. Since that finding, many authors have examined how a carefully designed debt management strategy can serve as an means of commitment to low inflation. For example, Persson, Persson and Svensson [12] and Calvo and Guidotti [3] illustrate that by trading in nominal and indexed debt, the government can eliminate its incentive to engineer inflationary surprises and thus increase social welfare in a rational-discretion world.' In a somewhat related paper, Missale and Blanchard [10] demonstrate how effective debt maturity can serve as a credible means of committing to no inflation.2 The above models of debt management as commitment to low inflation implicitly assume that the fiscal authority has access to the process of money creation. When that is the case, the optimal structure of government debt depends crucially on how that structure affects expectations of inflation. However, when the central bank is independent of the central government in the sense that money growth targets are set by the central bank and independently of the federal debt and deficits, the expected rate of inflation will be unaffected by the debt management decision. Thus, unlike a government with close ties to its central bank, a government that does not control inflation will be able to choose the structure of its debt without affecting the expected rate of inflation. This implies that the optimal debt management strategies for governments with and without independent central banks will differ and suggests that one can look at the particular structure of a given government's debt in order to obtain inferences about the state of its central bank's independence.

A Scorecard for Indexed Government Debt

Within the last five years, Canada, Sweden, and New Zealand have joined the ranks of the United Kingdom and other countries in issuing government bonds that are indexed to inflation. Some observers of the experience in these countries have argued that the United States should follow suit. This paper provides an overview of the issues surrounding debt indexation, and it tries to answer three empirical questions about indexed debt. First, how different would the returns on indexed bonds be from the returns on existing U.S. debt instruments? Second, how would indexed bonds affect the government's average financing costs? Third, how might the Federal Reserve be able to use the information contained in the prices of indexed bonds to help formulate monetary policy? The paper concludes with a more speculative discussion of the possible consequences of increased use of indexed debt contracts by the private sector.

A Scorecard for Indexed Government Debt

Within the last five years, Canada, Sweden, and New Zealand have joined the ranks of the United Kingdom and other countries in issuing government bonds that are indexed to inflation. Some observers of the experience in these countries have argued that the United States should follow suit. This paper provides an overview of the issues surrounding debt indexation, and it tries to answer three empirical questions about indexed debt. First, how different would the returns on indexed bonds be from the returns on existing U.S. debt instruments? Second, how would indexed bonds affect the government's average financing costs? Third, how might the Federal Reserve be able to use the information contained in the prices of indexed bonds to help formulate monetary policy? The paper concludes with a more speculative discussion of the possible consequences of increased use of indexed debt contracts by the private sector.

Wage and Public Debt Indexation

The relationship between the degree of wage indexation chosen by private agents and the degree of public debt indexation chosen by the government is examined. It is shown that the government is likely to increase public debt indexation in response to an increase in wage indexation. By contrast, higher public debt indexation has an ambiguous effect on wage indexation. In equilibrium, wage and public debt indexation may be positively or negatively related. This relationship is analyzed in situations where the policymakers can precommit to policies and in those they cannot.

Time consistency of government financial policy in a small open economy

This paper derives sufficient conditions for the time-consistency of optimal fiscal policy in a small open economy. Results depend critically on the debt instruments used by the government. If the government employs only conventional debt, a sufficient condition for time-consistency is that the optimal policy equalizes tax rates across periods. If the government also issues consumption indexed debt, the optimal policy can always be made time consistent by an appropriate mix of conventional and indexed debt. For a specific example, a simple rule for indexed debt management can be derived.

Wage and Public Debt Indexation

This paper examines the relationship between the degree of wage indexation chosen by private agents and the degree of indexation of the public debt. It is shown that the government is likely to respond to an increase in the degree of wage indexation by increasing the portion of the public debt that is indexed. By contrast, the effect of an increase in public debt indexation on the degree of wage indexation is ambiguous. In equilibrium, depending on the sources of shocks to the economy, the degree of wage indexation may be positively or negatively related to that of debt indexation. This relationship is analyzed both in situations where the policymakers are able to precommit policies and in those where precommitment is not possible.

Wage and Public Debt Indexation

This paper examines the relationship between the degree of wage indexation chosen by private agents and the degree of indexation of the public debt. It is shown that the government is likely to respond to an increase in the degree of wage indexation by increasing the portion of the public debt that is indexed. By contrast, the effect of an increase in public debt indexation on the degree of wage indexation is ambiguous. In equilibrium, depending on the sources of shocks to the economy, the degree of wage indexation may be positively or negatively related to that of debt indexation. This relationship is analyzed both in situations where the policymakers are able to precommit policies and in those where precommitment is not possible.

Tax Rates, Deficits, and Intertemporal Efficiency

This article contains the derivation of a compact elasticity formula for the efficient taxation of labor income in an intertemporal setting. The question of whether or not efficient public financial policy will involve constant tax rates over time is addressed by reference to this formula under various specifications of the economic environment. A specific set of assumptions sufficient to generate tax constancy consists of (1) preferences of the isoelastic marginal utility class and (2) public debt indexation to aggregate consumption levels. In this instance, the government would find it optimal to run deficits—holding tax rates constant—when either public expenditure levels are high or when tax base levels are low.

Why do we have nominal government debt?

We study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy. With distortionary taxes, nominal debt provides valuable insurance against the budgetary effects of economic fluctuations. We show that a welfare-maximizing government always issues some nominal debt even though nominal debt increases inflation along the time-consistent path of the economy. The result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting.

Welfare and Savings Effects of Indexation

WE SEEK TO ACCOMPLISH two goals in this paper. First, we provide a clarifying discussion of the welfare implications of the introduction of indexed debt contracts in a financial market, an issue that has been discussed in [ 1, 9, 11] in this journal, as well as in [3, 12, 13]. We show that doubts about the Pareto-superiority of indexed debt contacts that have been raised in some of this literature are methodologically incorrect, and that, not surprisingly, the introduction of indexed debt contracts at an equilibrium of the nonindexed economy does indeed lead to a Pareto-superior allocation. Second, we derive and examine the implications of suffcient general-equilibrium conditions for (aggregate) savings to rise or decline as a result of the introduction of indexed debt. These conditions allow for general utility functions and take into account the fact that, in general, all prices may change as a result of the introduction of a contract that changes the asset economy. As a result, the conclusions derived are, in their rigor, generality and (as it turns out) simplicity, a significant improvement on the results of Levhari and Liviatan [4, 5] on the same issue. As in most of the literature in this area, our analysis is carried out in the framework of a two-period mean-variance model of consumption and portfolio choice, although