Bond Vigilantes and Inflation

Andrew Rose and Mark Spiegel

International Journal of Central Banking, 2018, vol. 14, issue 2, 263-300

Abstract: This paper explores the relationship between inflation and the existence of a local, nominal, publicly traded, longmaturity, domestic currency bond market. Domestic bond markets have an unclear effect on inflation; they present issuing governments with the opportunity to inflate away their debt obligations, but they also expose bondholders to capital losses through inflation, creating a potential anti-inflationary force. We ask whether the latter effect is apparent empirically. We use a panel of data, examining inflation before and after the introduction of a domestic bond market. Inflationtargeting countries with a bond market experience inflation at least 3 to 4 percentage points lower than those without one. This effect is economically and statistically significant; it is also insensitive to a variety of estimation strategies. In particular, we use a wide variety of political and fiscal instrumental variables to account for the potential endogeneity of domestic bond issuance. Moreover, we do not find a similar effect for indexed or foreign currency bonds.

JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Working Paper: Bond vigilantes and inflation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2018:q:1:a:6

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