Nominal versus indexed debt: A quantitative horse race
The main arguments in favor and against nominal and indexed debts are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.
Year of publication: |
2010
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Authors: | Alfaro, Laura ; Kanczuk, Fabio |
Published in: |
Journal of International Money and Finance. - Elsevier, ISSN 0261-5606. - Vol. 29.2010, 8, p. 1706-1726
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Publisher: |
Elsevier |
Keywords: | Nominal debt Indexed debt Default Tax smoothing Contingent service Agency costs |
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