Public Debt Indexation and Denomination with and Independent Central Bank
IGIER Working Paper No. 169
28 Pages Posted: 1 Mar 2001
Date Written: July 2000
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: Suggested Citation