Drivers of inflation-linked public debt: an empirical investigation
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Drivers of inflation-linked public debt: an empirical investigation Patricia Gomez-Gonzalez 1 # Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This paper empirically explores the drivers behind the cross-country heterogeneity in inflation-linked (IL) debt for advanced and emerging economies between 1995 and 2017. It finds that countries with more flexible exchange rate regimes and higher tax rates issue more of their public debt linked to inflation. There is some evidence that high inflation countries issue more IL debt, but no indication that country size, financial development, or institutional quality is significantly associated with the IL debt share. For IL debt over gross domestic product, however, institutional quality matters, but the exchange rate regime and inflation do not. Keywords Inflation-linked debt . Public debt composition . Institutional factors JEL classification codes F34 . H63
1 Introduction The relevance of inflation-linked (IL) debt in countries’ public debt composition has increased substantially in recent years. Between 1995 and 2017, the average share of IL debt in public debt has increased by almost 9 times – from 1.2% to 10.7% – and the average share of IL debt to gross domestic product (GDP) has almost tripled – from 2% to 5.9%. Nonetheless, the popularity of this type of debt is highly uneven across countries. On the one hand, in 2016, Chile issued almost half of its public debt in this manner, and Israel, Brazil, and the United Kingdom issued more than a quarter; on the other hand, countries such as the Czech Republic, India, Korea, and Japan issued 1% or less of their public debt linked to inflation.
* Patricia Gomez-Gonzalez [email protected]; https://faculty.fordham.edu/pgomezgonzalez
1
Department of Economics, Fordham University, 113 W 60th Street, Room 924, New York, NY 10023, USA
P. Gomez-Gonzalez
Previous work on IL debt has studied its rationale vis-à-vis nominal debt from a normative perspective (Calvo 1978; Persson et al. 1987, 2006; Bohn 1988; Calvo and Guidotti 1990; Alfaro and Kanczuk 2010), its business cycle properties (GomezGonzalez 2019) and its diversification ability (Swinkels 2012). However, less is known about the drivers of cross-country heterogeneity in countries’ reliance on IL debt, which is therefore the focus of this study. Part of the reason for this gap in the literature could be that IL debt is a relatively new asset for many countries. Of the 26 countries in the study’s sample, half started their issuance in the 2000s, and Hungary, Japan, and Spain started only in the 2010s. Lack of available data could have prevented researchers from studying this topic. To investigate the drivers of the cross-country heterogeneity in IL debt, this study builds on the literature examining the factors driving local currency (LC) debt issuance in emerging markets and the original sin problem, which refers to countries’ inability to issue LC debt abroad (Eichengreen et al. 2002; Hausmann and Panizza 2003; Burger and Warnock 2006; Clae
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