In the wake of rising inflation in the aftermath of unprecedented debt financed stimulus packages, we ask: Can governments use real bonds (TIPS) as part of their debt portfolio to commit to stable inflation rates? We propose a novel framework of optimal debt management in the presence of sticky...

A tax-smoothing objective is used to assess the optimal consumption of public debt with respect to maturity and contingencies. This objective motivates the government to make its debt payout contingent on the levels of public outlay and the tax base. If these contingencies are present, but asset...

This paper studies cost of living adjustments in pensions from the perspective of labor economics. Evidence from longitudinal data on pension and annuity incomes of retirees suggests that pension COLAs are less important in the 1980s than in the 1970s, but that through 1987 they continued to...

Although inflation-linked bonds have many advantages, nominal bonds are the most important instrument to finance public debts throughout the world. One explanation that the literature has offered is that nominal bonds make countercyclical monetary policies more effective. This paper reconsiders...

Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies...

With the existing "historic cost" method of depreciation, higher inflation rates reduce the real value of future depreciation deductions and therefore raise the real net cost of investment. The calculations in this paper show that this rise in the net cost can be quite substantial at recent...

The Long Finance and London Accord community (over 48 financial institutions, thousands of people in finance and some 250 reports since 2005) has developed a simple, almost subversive, proposal for on climate change finance – index-linked carbon bonds. An indexlinked carbon bond is a...

The world's first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of...

We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a...

Initial public pensions are indexed to the economy-wide average wages, but pensions in progress are indexed to prices, average wages or their combinations - varying across countries and periods. We create a simple overlapping cohorts framework to study the properties of indexing pensions in...

Inflation risks are explicit in either (i) the nominal pricing of real payoffs in which prices are denominated in dollars, or (ii) the real pricing of nominal payoffs in which prices are denominated in consumption baskets. While the former involves over-the-counter inflation-indexed contracts of...

We derive the price of inflation-indexed bonds of which the payments are linked to a lagged price index, and solve for the optimal bond portfolio under both inflation and indexation lags in closed form. We show that indexation lags increase the number of state variables characterizing both the...

Risk often inhibits on-farm investment by smallholder farmers. Recent evidence indicates that index insurance and stress tolerant seeds can separately and partially offset this risk effect. In this study, we explore whether the complementarities between these two risk management technologies can...

Empirical research on the benefits of investing in inflation-linked bonds usually relies on a limited number of observations due to the relatively recent introduction of these assets. We estimate models for the break-even inflation rate and use these to create hypothetical inflation-linked bond...

In this paper we explore how small countries such as Malaysia, Singapore, and Taiwan, can offer their aging populations the means to protect their retirement income against inflation without the governments directly issuing inflation‐protected bonds. While inflation swaps are a well‐known...

We reconsider the problem of indexation of public pensions, emphasizing that similar contribution paths should imply similar benefit paths. This robustness criterion is only satisfied by full wage indexing, which in turn requires the politically unpopular reduction of the accrual rates. To...

In many policy areas it is essential to use the best estimates of life expectancy, but it is vital to most areas of pension policy. This paper presents the conceptual differences between static period and dynamic cohort mortality tables, estimates the differences in life expectancy for Portugal...

In many policy areas it is essential to use the best estimates of life expectancy, but such estimates are vital to most areas of pension policy - from indexed access age and the calculation of initial benefits to the financial sustainability of pension schemes and the operation of their...

This paper investigates the optimal investment strategy for a defined contribution (DC) pension plan during the decumulation phase which is risk-averse and pays close attention to inflation risk. The plan aims to maximize the expected constant relative risk aversion (CRRA) utility from the...

If one believes in a more sustained economic recovery in the near term than the more volatile one we have been witnessing over the past few years, and hence the inherent risk of accelerating inflation, Treasury inflation-protected securities (TIPS) could provide inflation protection to...

Flekenstein, Longstaff and Lustig (2014) find mispricing between Treasury bonds and Treasury Inflation-Protected Securities (TIPS) in the United States, suggesting that Treasury bonds are expensive relative to TIPS. I examine the existence of a mispricing in the Israeli government bond market, a...

Fleckenstein et al. (2014) document that nominal Treasuries trade at higher prices than inflation-swapped indexed bonds, which exactly replicate the nominal cash flows. We study whether this mispricing arises from liquidity premiums in inflation-indexed bonds (TIPS) and inflation swaps. Using US...

We examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortgages (ARMs). Using registry-based data on Swedish households, we estimate substantial heterogeneity in consumption...

Die Kalte Progression schwächt die Verteilungswirkungen des Steuersystems und führt zu einer Ausweitung der Steuerquote, die sich der demokratischen Kontrolle entzieht. Die Beseitigung der Kalten Progression ist somit angezeigt. - In der öffentlichen Debatte wird zumeist auf die Kalte...

Selective default is an event in which a sovereign issuer chooses not to meet obligations on a class of bonds, while servicing her other debt. This paper presents unique empirical evidence of selective default risk premium in inflation-linked sovereign bond (ILB) yields of Germany, France and...

This paper addresses the valuation of contracts which exhibit inflation-linked delayed payments. The origin and magnitude of the convexity valuation difference obtained through stochastic and deterministic modelling is described and explained. Results from "Convexity adjustments in...

Die Kalte Progression schwächt die Verteilungswirkungen des Steuersystems und führt zu einer Ausweitung der Steuerquote, die sich der demokratischen Kontrolle entzieht. Die Beseitigung der Kalten Progression ist somit angezeigt. In der öffentlichen Debatte wird zumeist auf die Kalte...

Die Kalte Progression schwächt die Verteilungswirkungen des Steuersystems und führt zu einer Ausweitung der Steuerquote, die sich der demokratischen Kontrolle entzieht. Die Beseitigung der Kalten Progression ist somit angezeigt. • In der öffentlichen Debatte wird zumeist auf die Kalte...

We investigate the added value of inflation-linked bonds in an investment portfolio. Recently, several studies questioned the added value of inflation-linked bonds based on empirical analyses on developed markets. We extend the cross-section of countries with a set of nine emerging markets and...