IDEAS home Printed from
   My bibliography  Save this paper

Inflation Risk and Sovereign Spreads


  • Illenin Kondo

    (Federal Reserve Board)

  • Fabrizio Perri

    (University of Minnesota)

  • Sewon Hur

    (University of Pittsburgh)


We document that the co-movement of inflation and domestic consumption growth fluctuates over time. We argue that the co-movement of inflation and domestic consumption growth affects debt pricing and debt dynamics. In particular, a positive co-movement of inflation and consumption makes returns on government bonds negatively correlated with domestic consumption: this lowers risk premia on nominal domestic debt while making the debt more risky for the government. We construct a simple model of nominal domestic government debt incorporating an explicit default decision and an exogenous inflation risk to assess the overall effect of the inflation process on risk premia, probability of explicit default and equilibrium borrowing costs. Our findings have implications for the debate on the costs and benefits of joining a monetary union.

Suggested Citation

  • Illenin Kondo & Fabrizio Perri & Sewon Hur, 2013. "Inflation Risk and Sovereign Spreads," 2013 Meeting Papers 855, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:855

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed013:855. 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: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.