Publication Date: May 1996
Within the last ﬁve years, Canada, Sweden and New Zealand have joined the ranks of the United Kingdom and other countries in issuing government bonds that are indexed to inflation. Some observers of the experience in these countries have argued that the United States should follow suit. This paper provides an overview of the issues surrounding debt indexation, and it tries to answer three empirical questions about indexed debt. First, how diﬀerent would the returns on indexed bonds be from the returns on existing US debt instruments? Second, how would indexed bonds aﬀect the government’s average ﬁnancing costs? Third, how might the Federal Reserve be able to use the information contained in the prices of indexed bonds to help formulate monetary policy? The paper concludes with a more speculative discussion of the possible consequences of increased use of indexed debt contracts by the private sector.
Published in Ben S. Bernanke and Julio Rotemberg, eds., National Bureau of Economic Research Macroeconomics Annual 1996, Vol. 2. MIT Press, 1996, pp. 155-197 [NBER]