Global Lecture Series, Fall 2020
Tuesday, November 10, 6:30PM-8:00PM (New Delhi)
Optimal public debt indexation in advanced economies
Dr. Patricia Gomez-Gonzalez
Assistant Professor (Economics)
Advanced economies issue part of their public debt linked to inflation. For example, the UK issues 24% of its public debt in this manner; the US issues 10%. This paper studies optimal public debt management when governments can issue IL debt and nominal debt and aim to minimize tax distortions, debt investors are risk-neutral, and nominal debt carries a convenience premium. The optimal IL debt share is decreasing in the convenience premium and in the correlation between real government spending and inflation and is increasing in the variance of inflation and average inflation. Data between 1995 and 2018 for the 14 advanced economies that issue IL debt exhibit correlations in line with the model’s findings. In particular, the correlation between the IL debt share and the correlation between government spending and inflation equals -59.4%, which is consistent with IL debt acting as a hedge in the government’s budget constraint. The next step of this work-in-progress is to study how the results change if debt investors are risk-averse.
About the Speaker:
Dr. Patricia Gomez-Gonzalez is an assistant professor in the Department of Economics at Fordham University and a fellow at the Rimini Center for Economic Analysis. Her research lies in the areas of international finance and macroeconomics. In particular, she studies public debt structure, with an emphasis on inflation-linked public debt, and sovereign debt crises. Some of her work has focus on monetary policy in open economies.
Moderator: Dr. Chitrakalpa Sen, Associate Professor (Economics), JGBS