Welfare-enhancing inflation and liquidity premia

David Andolfatto () and Fernando Martin

No 2023-001, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We investigate what principles govern the evolution and maturity structure of the national debt when nominal government securities constitute an important form of exchange media. Even in the absence of government funding risk, we find a rationale for issuing nominal debt in different maturities, purposely mispricing long-term debt, and growing the nominal debt to support a strictly positive inflation target. The policy of discounting long-term debt and supporting a strictly positive inflation target provides superior risk-sharing arrangements for clienteles characterized by different degrees of patience. Pareto improvements are possible only if these policies are offered jointly.

Keywords: term premium; liquidity; inflation target (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-01, Revised 2023-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Note: Publisher DOI: https://doi.org/10.1016/j.red.2023.09.007
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Published in Review of Economic Dynamics

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Journal Article: Welfare-enhancing inflation and liquidity premia (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:95578

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DOI: 10.20955/wp.2023.001

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