Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

39 Pages Posted: 14 Feb 2006

See all articles by Thomas F. Cosimano

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Michael Gapen

International Monetary Fund (IMF) - International Capital Markets Department

Date Written: November 2003

Abstract

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.

Keywords: Ramsey policy, Optimal monetary policy, Optimal taxation

JEL Classification: E44, E63, H63

Suggested Citation

Cosimano, Thomas F. and Gapen, Michael, Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt (November 2003). IMF Working Paper No. 03/225, Available at SSRN: https://ssrn.com/abstract=880919

Thomas F. Cosimano

University of Notre Dame ( email )

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International Monetary Fund ( email )

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Michael Gapen (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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