Nominal versus Indexed Debt: A Quantitative Horse Race / Laura Alfaro, Fabio Kanczuk.

Format:

Book

Author/Creator:

Alfaro, Laura.

Contributor:

National Bureau of Economic Research.

Kanczuk, Fabio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13131.

NBER working paper series no. w13131

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Nominal versus Indexed Debt

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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:

Print version record

May 2007.