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Public Debt Indexation and Denomination with and Indipendent Central Bank

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  • Alessandro Missale
  • Elisabetta Falcetti

Abstract

This paper examines the interaction between public debt management and the design of monetary institutions. The analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation-indexed debt. If delegation of monetary policy is viable, the optimal policy is to issue conventional debt. This increases the sensitivity of taxes and output to unexpected inflation, thus minimizing the inflation needed to offset supply shocks. Evidence on central bank independence, debt composition and output variability suggests that the normative argument has some positive content.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 169.

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Handle: RePEc:igi:igierp:169

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Citations

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Cited by:
  1. Arnaud Mehl & Julien Reynaud, 2008. "Domestic debt structures in emerging markets : new empirical evidence," Documents de travail du Centre d'Economie de la Sorbonne bla08059, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Mehl, Arnaud & Reynaud, Julien, 2005. "The determinants of ‘domestic’ original sin in emerging market economies," Working Paper Series 0560, European Central Bank.
  3. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
  4. Michael Bleaney & F. Gulcin Ozkan, 2008. "Foreign Debt and Fear of Floating: A Theoretical Exploration," Discussion Papers 08/10, Department of Economics, University of York.
  5. Giavazzi, Francesco & Missale, Alessandro, 2004. "Public Debt Management in Brazil," CEPR Discussion Papers 4293, C.E.P.R. Discussion Papers.
  6. Kang Yong Tan & Prasanna Gai, 2004. "Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem," Econometric Society 2004 Far Eastern Meetings 446, Econometric Society.
  7. Melecky, Martin, 2010. "Choosing the Currency Structure of Foreign-currency Debt: a Review of Policy Approaches," MPRA Paper 21268, University Library of Munich, Germany.
  8. Mehl, Arnaud & Reynaud, Julien, 2010. "Risky public domestic debt composition in emerging economies," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 1-18, February.
  9. Fratzscher, Marcel & Bussière, Matthieu, 2004. "Financial openness and growth: short-run gain, long-run pain?," Working Paper Series 0348, European Central Bank.
  10. Alessandro Missale, 2012. "Sovereign debt management and fiscal vulnerabilities," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 157-176 Bank for International Settlements.
  11. Giorgio Basevi & Lorenzo Pecchi & Gustavo Piga, 2005. "Parallel Monies, Parallel Debt: Lessons from the EMU and Options for the New EU," CEIS Research Paper 68, Tor Vergata University, CEIS.

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