Indexation and Maturity of Government Bonds : A Simple Model
The central issue of the paper is the optimality of different degrees of price indexation and maturity structures of government debt when markets are incomplete and policymakers face quot;credibilityquot; problems.The analysis shows that price indexation is useful because it affects the relevant inflation tax base and allows governments to strike the optimal balance between the gains from conventional tax smoothing and the inflation costs associated with time-consistent policies. On the other hand, debt maturity management matters because it allows governments to alter the time profile of the inflation tax base and to influence the intertemporal path of incentive-compatible inflation