A comparison of nominal and indexed debt under fiscal constraints

Ed Westerhout, R.M.W.J. Beetsma

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper makes a welfare comparison between the issuance of price-indexed and nominal public debt in the presence of fiscal constraints, viz. a debt constraint, a deficit constraint and a combination of both. Distortionary taxes or public consumption are regulated to avoid the violation of the relevant fiscal constraint(s). Under a debt constraint indexed debt is generally preferred, while under a deficit constraint the results are more mixed. Introducing inflation persistence and raising the maturity of the debt tend to increase the magnitude of the welfare differences between the two types of debt. Welfare differences are further affected by the degree to which public consumption and tax revenues are
indexed to actual versus structural nominal GDP.
Original languageEnglish
Pages (from-to)177-194
Number of pages18
JournalJournal of International Money and Finance
Volume91
DOIs
Publication statusPublished - Mar 2019

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Fiscal
Debt
Public consumption
Debt constraints
Violations
Tax revenues
Maturity
Inflation persistence
Distortionary taxes
Welfare comparisons
Public debt

Keywords

  • Indexed debt
  • nominal debt

Cite this

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A comparison of nominal and indexed debt under fiscal constraints. / Westerhout, Ed; Beetsma, R.M.W.J.

In: Journal of International Money and Finance, Vol. 91, 03.2019, p. 177-194.

Research output: Contribution to journalArticleScientificpeer-review

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