The Politics of Index‐Linked Bonds

L. Pecchi and Gustavo Piga

Economics and Politics, 1999, vol. 11, issue 2, 201-212

Abstract: In this paper we will seek to provide a political economy explanation for the government issuance of indexed bonds. We will show that the issuance of nominal bonds decreases inflation whenever the bondholders’ constituency is stronger than the taxpayers’ constituency. We then assume that public debt management is influenced by the Central Bank. Contrary to what is predicted by the traditional time‐inconsistency approach, we show that when the creditor constituency is more powerful than the taxpayers’ constituency, by offering inflation protection through the issuance of indexed bonds the Central Bank reduces the creditors’ efforts against inflation and thereby raises equilibrium inflation.

Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:bla:ecopol:v:11:y:1999:i:2:p:201-212

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