Nominal versus indexed debt
Subtitle: a quantitative horse race
By: Laura Alfaro, Fabio Kanczuk
Contributors: Kanczuk, Fabio, 1969-; Harvard Business School. Division of Research
Edition: Rev. ed.
Series: Working paper / Harvard Business School -- 05-053; Working paper (Harvard Business School. Division of Research) -- 05-053.
Publisher: Harvard Business School
Published: 2005
Place of publication: Boston
Language: eng
Number of pages: 31
Description: The main arguments in favor and against nominal and indexed debt 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.
Notes: "February 2005, revised March 2010"--Publisher's website.

Includes bibliographical references.