Public Debt Indexation and Denomination with and Independent Central Bank

IGIER Working Paper No. 169

28 Pages Posted: 1 Mar 2001

See all articles by Elisabetta Falcetti

Elisabetta Falcetti

European Bank for Reconstruction and Development (EBRD)

Alessandro Missale

University of Milan - Department of Business Policy and Economics

Date Written: July 2000

Abstract

This paper examines the interaction between public debt management and the design of monetary institutions. The analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation-indexed debt. If delegation of monetary policy is viable, the optimal policy is to issue conventional debt. This increases the sensitivity of taxes and output to unexpected inflation, thus minimizing the inflation needed to offset supply shocks. Evidence on central bank independence, debt composition and output variability suggests that the normative argument has some positive content.

Keywords: central bank independence, public debt management, foreign currency debt, inflation-indexed debt

JEL Classification: E52, E58, H63

Suggested Citation

Falcetti, Elisabetta and Missale, Alessandro, Public Debt Indexation and Denomination with and Independent Central Bank (July 2000). IGIER Working Paper No. 169, Available at SSRN: https://ssrn.com/abstract=261649 or http://dx.doi.org/10.2139/ssrn.261649

Elisabetta Falcetti

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

Alessandro Missale (Contact Author)

University of Milan - Department of Business Policy and Economics ( email )

Via Conservatorio 7
I-20122 Milano
Italy

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