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Nominal versus Indexed Debt: A Quantitative Horse Race

  • Laura Alfaro
  • Fabio Kanczuk

The main arguments in favor and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.

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File URL: http://www.nber.org/papers/w13131.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13131.

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Date of creation: May 2007
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Publication status: published as Alfaro, Laura & Kanczuk, Fabio, 2010. "Nominal versus indexed debt: A quantitative horse race," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1706-1726, December.
Handle: RePEc:nbr:nberwo:13131
Note: IFM ME PE
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  1. Laura Alfaro & Fabio Kanczuk, 2007. "Optimal reserve management and sovereign debt," Working Paper Series 2007-29, Federal Reserve Bank of San Francisco.
  2. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002. "Optimal Monetary Policy," NBER Working Papers 9402, National Bureau of Economic Research, Inc.
  3. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
  4. Stefania Albanesi & V.V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," NBER Working Papers 8912, National Bureau of Economic Research, Inc.
  5. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  8. Alfaro, Laura & Kanczuk, Fabio, 2005. "Sovereign debt as a contingent claim: a quantitative approach," Journal of International Economics, Elsevier, vol. 65(2), pages 297-314, March.
  9. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-fulfilling debt crises," Staff Report 211, Federal Reserve Bank of Minneapolis.
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  20. Fabio Kanczuk, 2004. "Real Interest Rates and Brazilian Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 436-455, April.
  21. Grossman, Herschel I. & Han, Taejoon, 1999. "Sovereign debt and consumption smoothing," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 149-158, August.
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  31. Laura Alfaro & Fabio Kanczuk, 2009. "Debt Maturity: Is Long-Term Debt Optimal?," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 890-905, November.
  32. repec:rus:hseeco:123922 is not listed on IDEAS
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