Working Paper: NBER ID: w0874
Authors: Stanley Fischer
Abstract: Government issue of bonds indexed to the price level has long been recommended by economists, to no observed effect. Recently skepticism has been expressed about the real effects of such government action, or indeed of any government financial intermediation. This paper examines two main approaches that might argue for government issue of indexed bonds. The first asks what financial intermediation can be provided by government that the private sector cannot provide. The answer is that the government can use its taxation powers to make possible intergenerational risk sharing that private markets cannot. This argument suggests government issue of bonds indexed to wage income. The second approach discusses optimal forms of government debt issue in light of the government's ability to manipulate the payoffs on debt which has an uncertain real return. In this context indexed debt has the potential advantage of enforcing consistency in government financing and actions
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government taxation (H29) | intergenerational risk sharing (D15) |
| price level stability decreases (E31) | likelihood of issuing indexed debt (G12) |