Public Debt Indexation Research Articles

Optimal public debt indexation in advanced economies

Abstract This article examines the cross-country heterogeneity in the share of advanced economies’ inflation-linked (IL) debt when governments, taking inflation as given, issue IL debt and nominal debt and aim to minimize tax distortions, debt investors are risk-neutral, and nominal debt carries a convenience premium. The optimal IL debt share increases in the level and the variance of inflation, decreases in the correlation between government spending and inflation, and, for a fixed level of debt, decreases in the nominal debt’s convenience premium. Data between 1995 and 2018 for 14 advanced economies that issue IL debt exhibit cross-country correlations in line with the model’s comparative statics about inflation. The model’s welfare analysis suggests that nominal debt’s convenience premium can explain the relatively low public debt indexation in most advanced economies.

Implications of Public Debt Indexation for Monetary Policy Transmission

The goal of this paper is to provide a better understanding of monetary policy effectiveness in the case of indexed bonds. When public debt management deals with bonds indexed to the interest rate set by the monetary policy, there is no wealth effect and, as a consequence, monetary policy has a weak transmission channel reducing its effectiveness. This can help to explain why monetary policy in Brazil has been so tight and interest rates so high during the Real Plan.

Public debt indexation and denomination, the case of Brazil: a comment

AbstractIn this work I analyse the model proposed by Goldfajn to study the choice of the denomination of the public debt. The main purpose of the analysis is to point out possible reasons why new empirical evidence provided by Bevilacqua et al., regarding a more recent time period, gives less empirical support to the model. I also provide a measure of the overestimation of welfare gains from hedging the debt caused by the simplified time frame of Goldfajn's model. Assuming a time‐preference parameter of 0.9, for instance, consumption gains associated with a hedge to the debt that reduces by half a one‐time 20%‐of‐GDP shock to government spending run around 1.43% under the no‐tax‐smoothing structure of the model. Under a Ramsey allocation, though, consumption increases by just 0.05%. Copyright © 2007 John Wiley & Sons, Ltd.

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.

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.

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.

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.

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.

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.

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.

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.

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.