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Lower borrowing costs with inflation-indexed bonds: A trading rule based assessment

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  • Reschreiter, Andreas

Abstract

A simple trading rule invests in long-term bonds or the risk-free asset based on publicly observed economic variables. The results indicate a predictable inflation risk premium for conventional bonds but no ex-ante risk compensation for indexed bonds. This suggests the government can achieve lower funding costs by issuing indexed debt.

Suggested Citation

  • Reschreiter, Andreas, 2008. "Lower borrowing costs with inflation-indexed bonds: A trading rule based assessment," Economics Letters, Elsevier, vol. 99(2), pages 272-274, May.
    • Handle: RePEc:eee:ecolet:v:99:y:2008:i:2:p:272-274
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    References listed on IDEAS

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    1. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
    2. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, vol. 6(4), pages 537-554, October.
    3. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    4. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    5. Mr. Robert T Price, 1997. "The Rationale and Design of Inflation-Indexed Bonds," IMF Working Papers 1997/012, International Monetary Fund.
    6. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 155-208, National Bureau of Economic Research, Inc.
    7. Marcello de Cecco & Lorenzo Pecchi & Gustavo Piga (ed.), 1997. "Managing Public Debt," Books, Edward Elgar Publishing, number 1172.
    8. Frank F. Gong & Eli M. Remolona, 1996. "Inflation risk in the U.S. yield curve: the usefulness of indexed bonds," Research Paper 9637, Federal Reserve Bank of New York.
    9. Pesaran, M Hashem & Timmermann, Allan, 1995. "Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-1228, September.
    10. Andreas Reschreiter, 2004. "Risk factors of inflation-indexed and conventional government bonds and the APT," Money Macro and Finance (MMF) Research Group Conference 2003 79, Money Macro and Finance Research Group.
    11. Reschreiter, Andreas, 2004. "Conditional funding costs of inflation-indexed and conventional government bonds," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1299-1318, June.
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    Cited by:

    1. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, vol. 6(4), pages 537-554, October.
    2. Andreas Reschreiter, 2010. "The inflation protection from indexed bonds," Applied Economics Letters, Taylor & Francis Journals, vol. 17(16), pages 1581-1585.
    3. Reschreiter, Andreas, 2011. "The effects of the monetary policy regime shift to inflation targeting on the real interest rate in the United Kingdom," Economic Modelling, Elsevier, vol. 28(1), pages 754-759.
    4. Reschreiter, Andreas, 2011. "The effects of the monetary policy regime shift to inflation targeting on the real interest rate in the United Kingdom," Economic Modelling, Elsevier, vol. 28(1-2), pages 754-759, January.

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