## Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

_IMF Working Papers, November 1, 2003_

## Source details

**Canonical URL:** [Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt](https://www.imf.org/en/publications/wp/issues/2016/12/30/optimal-fiscal-and-monetary-policy-with-nominal-and-indexed-debt-16944)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/optimal-fiscal-and-monetary-policy-with-nominal-and-indexed-debt-16944/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/30/optimal-fiscal-and-monetary-policy-with-nominal-and-indexed-debt-16944/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/30/optimal-fiscal-and-monetary-policy-with-nominal-and-indexed-debt-16944/bundle-manifest.json)

## Bibliographic details
- Authors: Thomas F. Cosimano, Michael T. Gapen
- Published: November 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875379.001

---

### 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.

### Key Findings
- Debt composition matters for both short-run business cycles and long-run policy outcomes.
- Nominal debt functions as state-contingent debt and can be used to hedge government budget shocks.
- Using nominal debt to hedge budget shocks reduces the volatility of distortionary government policy.
- Reduced policy volatility translates into lower macroeconomic volatility and higher equilibrium output and consumption.
- The welfare gain from hedging with nominal debt equals the welfare gain from the ability to issue debt.

### Policy Implications
- Design of fiscal and monetary policy should incorporate debt composition as a policy variable.
- Issuance choices between nominal and indexed debt can be used proactively to stabilize macroeconomic outcomes.
- Policymakers can achieve welfare improvements comparable to those from access to debt markets by exploiting nominal debt’s state-contingent properties.

---

## Content in this bundle

- **_wp03225**
  - [_wp03225 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03225.pdf.md){rel="alternate" type="text/markdown"}
  - [_wp03225 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03225.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/optimal-fiscal-and-monetary-policy-with-nominal-and-indexed-debt-16944_