Inflation-linked bonds in incomplete markets with sunspots

Research output: Contribution to journalArticlepeer-review

Abstract

This paper investigates the impact of the introduction of inflation-linked bonds, which incur transaction costs when traded, on the monetary economy with sunspots. This paper shows that there always exists a certain range of positive transaction costs, where both monetary and bond markets are active. This implies that on top of governments, profit-seeking financial entrepreneurs also have the incentive to issue these bonds. This paper also displays how financial innovation on the indexed bond can be Kaldor improving, even if not necessarily Pareto improving. This finding indicates that together with lump-sum tax policies, the government can attain consensus among consumers on bond issuance.

Original languageEnglish
Pages (from-to)928-944
Number of pages17
JournalMacroeconomic Dynamics
Volume27
Issue number4
DOIs
Publication statusPublished - 2023 Jun

Bibliographical note

Publisher Copyright:
© 2023 Cambridge University Press. All rights reserved.

Keywords

  • inflation volatility
  • Inflation-indexed bonds
  • Kaldor improving
  • sunspots
  • transaction costs

ASJC Scopus subject areas

  • Economics and Econometrics

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