Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

Thomas Cosimano and Michael Gapen

No 2003/225, IMF Working Papers from International Monetary Fund

Abstract: This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.

Keywords: WP; nominal debt; indexed debt; debt structure; debt composition; Ramsey policy; Optimal monetary policy; Optimal taxation; certainty equivalent; Consumption; Labor taxes; Labor supply (search for similar items in EconPapers)
Pages: 39
Date: 2003-11-01
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Citations: View citations in EconPapers (2)

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