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Euro area inflation linked debt: An evaluation

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  • Equiza-Goñi, Juan

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%.

Suggested Citation

  • Equiza-Goñi, Juan, 2023. "Euro area inflation linked debt: An evaluation," Economics Letters, Elsevier, vol. 232(C).
    • Handle: RePEc:eee:ecolet:v:232:y:2023:i:c:s0165176523003889
    DOI: 10.1016/j.econlet.2023.111363
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    References listed on IDEAS

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    1. Equiza-Goñi, Juan & Faraglia, Elisa & Oikonomou, Rigas, 2023. "Union debt management," Journal of International Money and Finance, Elsevier, vol. 130(C).
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    1. Piotr Borawski & Aneta Beldycka-Borawska & Ireneusz Zuchowski & Tomasz Rokicki & Andrzej Parzonko & Lisa Holden & Renata Marks-Bielska, 2024. "Analyzing the Correlation between Central Bank Interest Rates and Inflation on the Example of Poland within the European Union," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 82-95.

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    More about this item

    Keywords

    ILBs; Fiscal burden; Debt dynamics; Inflation;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets

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