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Bond vigilantes and inflation

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  • Andrew K. Rose
  • Mark M. Spiegel

Abstract

We explore the relationship between inflation and the existence of a local domestic?currency bond market. Domestic bond markets allow governments to inflate away their debt obligations, but also create a potential anti-inflationary force of bond holders. We develop a simple model where bond issuance may lead to political pressure on the government to choose a lower inflation rate. We then check this prediction empirically, finding that inflation?targeting countries with bond markets experience inflation approximately three to four percentage points lower than those without. This effect is insensitive to a variety of estimation strategies and methods to account for potential endogeneity.

Suggested Citation

  • Andrew K. Rose & Mark M. Spiegel, 2015. "Bond vigilantes and inflation," Working Paper Series 2015-9, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2015-09
    DOI: 10.24148/wp2015-09
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    Cited by:

    1. Hale, Galina B. & Jones, Peter C. & Spiegel, Mark M., 2020. "Home currency issuance in international bond markets," Journal of International Economics, Elsevier, vol. 122(C).
    2. Louis Rouanet & Peter Hazlett, 2023. "The redistributive politics of monetary policy," Public Choice, Springer, vol. 194(1), pages 1-26, January.
    3. Jatmiko, Wahyu & Ebrahim, M. Shahid & Smaoui, Houcem, 2023. "Sukūk development and income inequality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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