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On the Effects of Indexed Bonds in Developing Countries

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  • Samuelson, Larry

Abstract

The government issue of indexed bonds is often suggested as a response to inflation. While issuing such bonds may initially appear to enchance the government's ability to control the economy, recent studies have described a variety of indexing-induced distortions. In light of this, an assessment of the desirability of indexing has been elusive. This paper exploits the envelope theorem to construct a framework within which the advantages and costs of indexing can be easily examined, and derives conditions under which optimal policies will include indexing. The impact of indexing can be captured in two effects: its tendency to transfer resources to the government and its tendency to reduce consumer liquidity. Indexing is more likely to be a preferred policy as the government is less concerned with bondholder utility levels. Copyright 1988 by Royal Economic Society.

Suggested Citation

  • Samuelson, Larry, 1988. "On the Effects of Indexed Bonds in Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 40(1), pages 168-192, March.
    • Handle: RePEc:oup:oxecpp:v:40:y:1988:i:1:p:168-92
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    Cited by:

    1. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España.

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