Optimal Management of Indexed and Nominal Debt
In: Indexation, Inflation and Monetary Policy
A tax-smoothing objective is used to assess the optimal composition of public debt with respect to maturity and contingencies. This objective motivates the government to make its debt payouts contingent on the levels of public outlay and the tax base. If these contingencies are present, but asset prices of non-contingent indexed debt are stochastic, then full tax smoothing dictates an optimal maturity structure of the non-contingent debt. If the certaintyequivalent outlays are the same for each period, then the government should guarantee equal real payouts in each period, that is, the debt takes the form of indexed consols. This structure insulates the government¡¯s budget constraint from unpredictable variations in the market prices of indexed bonds of various maturities. If contingent debt is precluded, then the government may want to depart from a consol maturity structure to exploit covariances among public outlay, the tax base, and the term structure of real interest rates. However, if moral hazard is the reason for the preclusion of contingent debt, then this consideration also deters exploitation of these covariances and tends to return the optimal solution to the consol maturity structure. The issue of nominal bonds may allow the government to exploit the covariances among public outlay, the tax base, and the rate of inflation. But if moral-hazard explains the absence of contingent debt, then the same reasoning tends to make nominal debt issue undesirable. The bottom line is that an optimal-tax approach to public debt favors bonds that are indexed and long term.
(This abstract was borrowed from another version of this item.)
|This chapter was published in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Indexation, Inflation and Monetary Policy, , chapter 5, pages 135-150, 2002.|
|This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v02c05pp135-150.|
|Contact details of provider:|| Postal: |
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
References listed on IDEAS
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.:
- V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993.
"Optimal Fiscal Policy in a Business Cycle Model,"
NBER Working Papers
4490, National Bureau of Economic Research, Inc.
- Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
- Barro, Robert J, 1974.
"Are Government Bonds Net Wealth?,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Barro, Robert J., 1979.
"On the Determination of the Public Debt,"
3451400, Harvard University Department of Economics.
- S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002.
"Optimal Taxation without State-Contingent Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 110(6), pages 1220-1254, December.
- Alesina, A. & Prati, A. & Tabellini, G., 1989.
"Public Confidence And Debt Management: A Model And A Case Study Of Italy,"
5, California Los Angeles - Applied Econometrics.
- Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
- Alesina, Alberto F & Prati, Alessandro & Tabellini, Guido, 1989. "Public Confidence and Debt Management: A Model and a Case Study of Italy," CEPR Discussion Papers 351, C.E.P.R. Discussion Papers.
- Fischer, Stanley, 1983. "`Optimal fiscal and monetary policy in an economy without capital' by Robert E. Lucas and Nancy L. Stokey," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 95-99.
- Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, vol. 55(6), pages 1419-31, November.
- Alessandro Missale & Olivier Jean Blanchard, 1991.
"The Debt Burden and Debt Maturity,"
NBER Working Papers
3944, National Bureau of Economic Research, Inc.
- Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
- Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
- Persson, Torsten & Svensson, Lars E. O., 1984. "Time-consistent fiscal policy and government cash-flow," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 365-374, November.
When requesting a correction, please mention this item's handle: RePEc:chb:bcchsb:v02c05pp135-150. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)
If references are entirely missing, you can add them using this form.