Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

November 1, 2003

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Consumption, Currencies, Expenditure, Labor, Labor supply, Labor taxes, National accounts, Taxes

Keywords: certainty equivalent, Consumption, debt composition, debt structure, indexed debt, Labor supply, Labor taxes, nominal debt, Optimal monetary policy, Optimal taxation, Ramsey policy, WP

Pages:
39
Volume:
2003
DOI:
https://doi.org/10.5089/9781451875379.001
Issue:
225
Series:
Working Paper No. 2003/225
Stock No:
WPIEA2252003
ISBN:
9781451875379
ISSN:
1018-5941

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