Euro area inflation linked debt: An evaluation
Keywords: 
ILBs
Fiscal burden
Debt dynamics
Inflation
Issue Date: 
2023
Publisher: 
Elsevier
ISSN: 
1873-7374
Note: 
This is an open access article under the CC BY-NC license
Citation: 
Equiza-Goñi, J. (Juan). "Euro area inflation linked debt: An evaluation". Economics Letters. 232, 2023, 111363
Abstract
How would the fiscal burden of Euro area (EA) countries have evolved without the issuance of inflation linked bonds (ILBs)? Could debt management through ILBs have decreased their sovereign debt-to-GDP ratio? By exploiting a new dataset on ILBs and the market value of debt in Germany, France, Italy and Spain in 2014–2022, I calculate the holding period return for investors in both nominal and real debt. Based on the government budget constraint, I conduct simulations that demonstrate the significant first-order effects of debt structure choices. Without ILBs the fiscal burden of the largest EA economies would have decreased by around 1% of GDP but in the case of Italy, it would have increased. Timing was also a relevant factor. Germany effectively controlled the cost of funds by managing its share of real debt, while Spain increased it by issuing ILBs when it was expensive. Slight ILB share adjustments could have alleviated their fiscal burden: Germany by 0.9%, France by 3%, Italy by 7%, and Spain by 1.8%.

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