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A comparison of nominal and indexed debt under fiscal constraints

Ed Westerhout
Authors registered in the RePEc Author Service: Roel Maria Wilhelmus Jozef Beetsma

No 11141, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 tends 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: 2016-02
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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Journal Article: A comparison of nominal and indexed debt under fiscal constraints (2019) Downloads
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