TY  - JOUR
AU  - Alfaro,Laura
AU  - Kanczuk,Fabio
TI  - Nominal versus Indexed Debt: A Quantitative Horse Race
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13131
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13131
L1  - http://www.nber.org/papers/w13131.pdf
N1  - Author contact info:
Laura Alfaro
Harvard Business School
Morgan Hall 263
Soldiers Field
Boston, MA 02163
Tel: 617/495-7981
Fax: 617/496-5985
E-Mail: lalfaro@hbs.edu

Fabio Kanczuk
University of São Paulo
R. Dr Alberto Cardoso de Melo Neto 110/131A
Sao Paulo-S.P.-CEP 01455-100
BRAZIL
Tel: 55-11-3814-9749
E-Mail: kanczuk@usp.br
AB  - The main arguments in favor and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.
ER  -