The Role of Inflation-Linked Bonds. Increasing, But Still Modest

CentER Discussion Paper Series No. 2017-027

32 Pages Posted: 15 Jun 2017  

Ed Westerhout

CPB Netherlands Bureau of Economic Policy Analysis; Tilburg School of Economics and Management

Ona Ciocyte

Independent

Date Written: June 14, 2017

Abstract

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

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

Ed Westerhout (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Tilburg School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

Ona Ciocyte

Independent ( email )

No Address Available

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