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The inflation protection from indexed bonds

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  • Andreas Reschreiter

Abstract

Indexed bonds provide protection against inflation if they are (i) insensitive to revisions of inflation expectations but (ii) adjust one-for-one to unexpected inflation. The sensitivity of British index-linked gilts to unexpected inflation is statistically significant and consistent with a unit response. This protection of British index-linked gilts against a loss of contemporaneous purchasing power is consistent with the view that indexed bonds avoid the inflation risk compensation of conventional bonds. This suggests that issuing indexed instead of conventional government bonds reduces the long-run funding costs of the public sector borrowing requirement.

Suggested Citation

  • Andreas Reschreiter, 2010. "The inflation protection from indexed bonds," Applied Economics Letters, Taylor & Francis Journals, vol. 17(16), pages 1581-1585.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:16:p:1581-1585
    DOI: 10.1080/13504850903066639
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    References listed on IDEAS

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    1. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
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    5. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    6. 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.
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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.

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