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Public Debt and Inflation: The Role of Inflation-Sensitive Instruments

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  • Mandilaras, Alexandros
  • Levine, Paul

Abstract

This paper examines the effect of inflation on the choice of government debt structure. We develop work by Missale and Blanchard (1994) to allow for the joint determination of inflation and the share of inflation-sensitive securities. We assume that governments prefer domestic nominal long-term debt. We show that the subgame perfect equilibrium involves a negative relation between inflationary expectations and the share of such debt. Panel data estimation for 15 OECD countries provides strong support for the theory. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Mandilaras, Alexandros & Levine, Paul, 2001. "Public Debt and Inflation: The Role of Inflation-Sensitive Instruments," Manchester School, University of Manchester, vol. 69(0), pages 1-21, Supplemen.
  • Handle: RePEc:bla:manchs:v:69:y:2001:i:0:p:1-21
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    1. repec:pje:journl:article11v is not listed on IDEAS
    2. Falcetti, Elisabetta & Missale, Alessandro, 2002. "Public debt indexation and denomination with an independent central bank," European Economic Review, Elsevier, vol. 46(10), pages 1825-1850, December.
    3. Ali al-Nowaihi & Paul Levine & Alex Mandilaras, 2006. "Central Bank Independence and the `Free Lunch Puzzle': A New Perspective," School of Economics Discussion Papers 0806, School of Economics, University of Surrey.

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