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Welfare-enhancing inflation and liquidity premia

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  • David Andolfatto
  • Fernando M. Martin

Abstract

We investigate what principles govern the evolution and maturity structure of the national debt when nominal government securities constitute an important form of exchange media. Even in the absence of government funding risk, we find a rationale for issuing nominal debt in different maturities, purposely mispricing long-term debt, and growing the nominal debt to support a strictly positive inflation target. The policy of discounting long-term debt and supporting a strictly positive inflation target provides superior risk-sharing arrangements for clienteles characterized by different degrees of patience. Pareto improvements are possible only if these policies are offered jointly.

Suggested Citation

  • David Andolfatto & Fernando M. Martin, 2023. "Welfare-enhancing inflation and liquidity premia," Working Papers 2023-001, Federal Reserve Bank of St. Louis, revised Sep 2023.
    • Handle: RePEc:fip:fedlwp:95578
    DOI: 10.20955/wp.2023.001
    Note: Publisher DOI: https://doi.org/10.1016/j.red.2023.09.007
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    References listed on IDEAS

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    More about this item

    Keywords

    term premium; liquidity; inflation target;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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