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;

JEL Classification: E4; E5;

https://doi.org/10.20955/wp.2023.001

Status: Published in Review of Economic Dynamics

Bibliographic Information

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

Related Works

• Working Paper Revision (2023-09) : You are here.
• Working Paper Original (2023-01) : Welfare-enhancing inflation and liquidity premia