Euro Area Inflation Linked Debt : An Evaluation

How would the fiscal burden of Euro area (EA) countries have evolved if they have not issued inflation linked bonds (ILBs)? Could debt management through ILBs have decreased the sovereign debt to GDP ratio of these countries? Exploiting a new dataset on ILBs and the market value of debt in the EA, I compute the holding period return to bondholders of both nominal and real debt. Based on the government budget constraint, I do simulations showing that, despite the recent rise of inflation, if the biggest EA economies had gone through 2015-2022 without ILBs their fiscal burden would have fallen only around 1% over GDP, and it would have risen in the case of Italy. Germany effectively restrained the cost of funds by managing its share of real debt whereas Spain increased it by issuing real debt at times when this was expensive. Managing the share of ILBs slightly differently, Germany would have reduced the fiscal burden by 0.8%, France 3.1%, Italy 7% and Spain 1.8%