Working Paper: CEPR ID: DP11141
Authors: Roel Beetsma; Ed Westerhout
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 tends 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.
Keywords: indexed debt; nominal debt; deficit; fiscal constraints; public consumption; tax revenues; welfare; inflation persistence; wage growth; debt maturity
JEL Codes: E62; H62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| indexed debt (G12) | stability of fiscal ratios (E62) |
| nominal debt (H63) | stability of deficit-to-GDP ratio (H68) |
| inflation persistence (E31) | welfare differences (I38) |
| debt maturity (H63) | welfare differences (I38) |
| indexed debt (G12) | welfare gain of 0.17% under debt constraint (D69) |
| nominal debt (H63) | welfare gain of 0.04% under deficit constraint (D69) |
| longer debt maturities (F34) | permanent consumption difference of 0.48% under debt constraint (D15) |