Developing a liquid market for inflation-indexed government securities: lessons from earlier experiences

Pu Shen

Economic Review, 2009, vol. 94, issue Q I, 89-113

Abstract: After a slow start in the 1980s, inflation-indexed government securities have gradually become more common in developed countries. A number of potential benefits arise with a government conducting part of its borrowing through inflation-indexed securities. Chief among them are better risk sharing for the economy, reduced government borrowing costs, less incentive for a deeply indebted government to inflate away its debt, and a new source of information about investors? inflation expectations. Many developed countries in coming decades will face the need to borrow more to finance the retirement of baby boomers. In the near future, a useful tool for these governments may be inflation-indexed securities. ; The experience of the countries that have already experimented with inflation-indexed government securities suggests that, to achieve the full benefits of these securities, liquid markets are essential. But, for inflation-indexed securities, liquid markets do not come easily. ; Shen reviews the experiences of a few countries that have issued inflation-indexed securities and draws some common lessons about promoting market liquidity. She explains why market liquidity is essential and explores some lessons from a number of countries about developing market liquidity.

Date: 2009
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