Nominal versus indexed debt
Subtitle: a quantitative horse race
By: Laura Alfaro, Fabio Kanczuk
Contributors: Kanczuk, Fabio, 1969-; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 05-053; Working paper (Harvard Business School. Division of Research) -- 05-053
Publisher: Division of Research, Harvard Business School
Published: 2005
Place of publication: Boston
Language: eng
Number of pages: 24
Description: There are different arguments in favor and against nominal and indexed debt which broadly include the incentive to default through inflation versus hedging against unforeseen shocks. We model these arguments and calibrate the model to assess the quantitative importance of each. We use a dynamic equilibrium model with tax distortion, government outlays, uncertainty, and contingent debt service, which we take to mean nominal debt. In the model, the benefits of defaulting through inflation are tempered by higher future interest rates. We obtain that calibrated costs from contingent inflation more than offset the benefits for any amount of nominal debt. We further discuss sustainability of nominal debt in volatile (developing) countries.
Notes: "January 2005"--Added t.p.

Includes bibliographical references.