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Public Debt Indexation and Denomination with and Indipendent Central Bank

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Author Info
Alessandro Missale
Elisabetta Falcetti

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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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  2. Bohn, Henning, 1990. "A positive theory of foreign currency debt," Journal of International Economics, Elsevier, vol. 29(3-4), pages 273-292, November. [Downloadable!] (restricted)
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  5. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-19, March.
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  6. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December. [Downloadable!] (restricted)
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  22. Canzoneri, Matthew B & Nolan, Charles & Yates, Tony, 1996. "Mechanisms for Achieving Monetary Stability: Inflation Targeting Versus the ERM," CEPR Discussion Papers 1418, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  23. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1997. "Central bank independence and public debt policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 873-894, May. [Downloadable!] (restricted)
  24. repec:fth:coluec:625 is not listed on IDEAS
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Prasanna Gai & Kang-yong Tan, 2004. "Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem," Working Papers 082004, Hong Kong Institute for Monetary Research. [Downloadable!]
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  2. Giavazzi, Francesco & Missale, Alessandro, 2004. "Public Debt Management in Brazil," CEPR Discussion Papers 4293, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Michael Bleaney & F. Gulcin Ozkan, . "Foreign Debt and Fear of Floating: A Theoretical Exploration," Discussion Papers 08/03, University of Nottingham, School of Economics. [Downloadable!]
  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. [Downloadable!]
  5. 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. [Downloadable!]
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