The Benefit of Inflation-Indexed Debt: Evidence from an Emerging Bond Market

Cristhian Hernando Ruiz Cardozo and Jens Christensen

No 2023-04, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance through greater reliance on inflation-indexed bonds for a representative emerging economy, Colombia. Using an arbitrage-free dynamic term structure model of fixed-coupon and inflation-indexed bond prices, we account for inflation and liquidity risk premia and calculate the net benefit of issuing inflation-indexed bonds over nominal bonds. Our results suggest that the Colombian government could lower its funding costs by as much as 0.69 percent by increasing its issuance of inflation-indexed debt, in particular at long maturities.

Keywords: term structures; Modeling; liquidity risk; financial market frictions; central bank credibility; debt management (search for similar items in EconPapers)
JEL-codes: D84 E31 E43 E44 E47 E52 E58 G12 (search for similar items in EconPapers)
Pages: 46
Date: 2023-02-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-fmk
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DOI: 10.24148/wp2023-04

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