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Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

  • Thomas F. Cosimano
  • Michael T. Gapen

This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/225.

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Length: 39
Date of creation: 01 Nov 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/225
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  13. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
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  30. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April.
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  34. Morris Goldstein, 2003. "Debt Sustainability, Brazil, and the IMF," Working Paper Series WP03-1, Peterson Institute for International Economics.
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