CentER Discussion Paper Series No. 2017-027
32 Pages Posted: 15 Jun 2017
Date Written: June 14, 2017
Although the market for inflation-linked bonds has expanded enormously, nominal bonds are still the main instrument to finance public debts. This paper seeks to explain why. It focuses on the Eurozone countries for which the standard argument that inflation-linked bonds may help to reduce inflation expectations, is less relevant. The paper demonstrates that inflation-linked bonds suffer from a lack of liquidity. Further, governments may find the use of inflation-linked bonds less attractive as these bonds amplify the volatility of the public deficit ratio. Two pieces of empirical evidence support our argument.
Keywords: Inflation-linked bonds, public debt, inflation risk, liquidity
JEL Classification: G12, H63
Suggested Citation: Suggested Citation
Westerhout, Ed and Ciocyte, Ona, The Role of Inflation-Linked Bonds. Increasing, But Still Modest (June 14, 2017). CentER Discussion Paper Series No. 2017-027. Available at SSRN: https://ssrn.com/abstract=2985310