Working Paper Revision
Welfare-enhancing inflation and liquidity premia
Abstract: We investigate what principles govern the evolution and maturity structure of the national debt when nominal government securities constitute an important form of exchange media. Even in the absence of government funding risk, we find a rationale for issuing nominal debt in different maturities, purposely mispricing long-term debt, and growing the nominal debt to support a strictly positive inflation target. The policy of discounting long-term debt and supporting a strictly positive inflation target provides superior risk-sharing arrangements for clienteles characterized by different degrees of patience. Pareto improvements are possible only if these policies are offered jointly.
Keywords: term premium; liquidity; inflation target;
https://doi.org/10.20955/wp.2023.001
Status: Published in Review of Economic Dynamics
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Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2023-09
Number: 2023-001
Note: Publisher DOI: https://doi.org/10.1016/j.red.2023.09.007
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- Working Paper Revision: Welfare-enhancing inflation and liquidity premia