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

Ed Westerhout, Ona Ciocyte

Research output: Working paperDiscussion paperOther research output

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages32
Volume2017-027
Publication statusPublished - 14 Jun 2017

Publication series

NameCentER Discussion Paper
Volume2017-027

Keywords

  • inflation-linked bonds
  • public debt
  • inflation risk
  • liquidity

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