Stochastic inflation and government provision of indexed bonds

Dan Peled

doi:10.1016/0304-3932(85)90017-0

Stochastic inflation and government provision of indexed bonds

Research output: Contribution to journal › Article › peer-review

Abstract

This paper examines the consequences of using indexed bonds as one of the government financing instruments, along with money and taxes. It is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics. Increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money. When provided by means other than open market operations, indexed bonds can affect the allocation of resources, but these reallocations cannot be Pareto-improving.

Original language	English
Pages (from-to)	291-308
Number of pages	18
Journal	Journal of Monetary Economics
Volume	15
Issue number	3
DOIs	https://doi.org/10.1016/0304-3932(85)90017-0
State	Published - May 1985
Externally published	Yes

Bibliographical note

Funding Information:
*Neil Wallace’s advice was instrumental for this research. I have also benefited from constructive comments by Zvi Pckstein, Martin Eichenbaum, Stephen LeRoy, Bennett McCall~, AlIan Melher, Charles Plosser and an anonymous referee. Shortcomings, however, are my own. This research was supported by NSF grant SES8107253. ‘Newsweek, October 14, 1981; April 19, 1982.

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/0304-3932(85)90017-0

Cite this

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AB - This paper examines the consequences of using indexed bonds as one of the government financing instruments, along with money and taxes. It is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics. Increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money. When provided by means other than open market operations, indexed bonds can affect the allocation of resources, but these reallocations cannot be Pareto-improving.

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Stochastic inflation and government provision of indexed bonds

Abstract

Bibliographical note

ASJC Scopus subject areas

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