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A comparison of nominal and indexed debt under fiscal constraints

Ed Westerhout and Roel Beetsma

Journal of International Money and Finance, 2019, vol. 91, issue C, 177-194

Abstract: This paper makes a welfare comparison between the issuance of price-indexed and nominal public debt in the presence of fiscal constraints, viz. a debt constraint, a deficit constraint and a combination of both. Distortionary taxes or public consumption are regulated to avoid the violation of the relevant fiscal constraint(s). Under a debt constraint indexed debt is generally preferred, while under a deficit constraint the results are more mixed. Introducing inflation persistence and raising the maturity of the debt tend to increase the magnitude of the welfare differences between the two types of debt. Welfare differences are further affected by the degree to which public consumption and tax revenues are indexed to actual versus structural nominal GDP.

Keywords: Indexed debt; Nominal debt; Deficit; Fiscal constraints; Public consumption; Tax revenues; Welfare; Inflation (persistence); Wage growth; Debt maturity (search for similar items in EconPapers)
JEL-codes: E62 H62 H63 (search for similar items in EconPapers)
Date: 2019
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Working Paper: A comparison of nominal and indexed debt under fiscal constraints (2016) Downloads
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