Nominal versus indexed debt
Subtitle: a quantitative horse race
By: Laura Alfaro, Fabio Kanczuk.
Contributors: Kanczuk, Fabio, 1969-; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13131.; Working paper series (National Bureau of Economic Research) -- working paper no. 13131.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 30
Subjects: Debts, Public -- Mathematical models
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: "May 2007"

Includes bibliographical references (p. 23-25).

Also available in PDF from the NBER world wide web site (www.nber.org).