Inflation-Indexed Bonds

Question A:

By issuing inflation-indexed bonds, and thereby providing a long-term real safe asset for pension funds and retirement savers, governments can make a substantial contribution to social welfare.

Responses weighted by each expert's confidence

Question B:

Issuance of inflation-indexed bonds substantially helps government commit to a responsible fiscal and monetary policy.

Responses weighted by each expert's confidence

Question A Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Strongly Agree
9
Bio/Vote History
Whenever long-run inflation prospects are uncertain (as is the case at present), government inflation-indexed bonds provide a safe real return that is not available from any other assets and that is important to offer to retirement savers and other long-term investors.
-see background information here
Cochrane
John Cochrane
Hoover Institution Stanford
Agree
7
Bio/Vote History
Inflation indexed bonds are an important security. But it is not necessary for governments to "provide" securities. Those bonds are repaid by taxes, so one pocket to another. The reluctance of the private sector, with real revenues, to issue index linked bonds is a puzzle.
Cornelli
Francesca Cornelli
Northwestern Kellogg Did Not Answer Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Agree
7
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Strongly Agree
10
Bio/Vote History
Many people want access to safe inflation-hedged ways to save. Even though issuing linkers is often not the cheapest way for governments to fund themselves, they can nevertheless offer linkers as a welfare enhancing opportunity to these savers.
Eberly
Janice Eberly
Northwestern Kellogg Did Not Answer Bio/Vote History
Gabaix
Xavier Gabaix
Harvard
Agree
9
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Agree
6
Bio/Vote History
Graham
John Graham
Duke Fuqua
Agree
1
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Agree
6
Bio/Vote History
Many retail investors do not have access to inflation hedging strategies and TIPS may be useful for these investors.
Hirshleifer
David Hirshleifer
USC
Uncertain
5
Bio/Vote History
Hong
Harrison Hong
Columbia
Agree
5
Bio/Vote History
Households could use more simple products to hedge inflation.
Jiang
Wei Jiang
Emory Goizueta
Agree
6
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Agree
3
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Agree
3
Bio/Vote History
it definitely helps, for it be substantial the number of people holding them needs to be more dispersed. it is disappointing that so few people have exposure to this asset class.
Koijen
Ralph Koijen
Chicago Booth
Agree
7
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Strongly Agree
8
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Strongly Agree
6
Bio/Vote History
Ludvigson
Sydney Ludvigson
NYU
Uncertain
8
Bio/Vote History
If they have the fiscal capacity to pay for it
Maggiori
Matteo Maggiori
Stanford GSB
Uncertain
1
Bio/Vote History
In practice these bonds have tended to be illiquid and attract mixed interest. There are a number of measurement and indexing issues. The practical impact has been somewhat disappointing even if there are good theoretical reasons for this market to exist.
Matvos
Gregor Matvos
Northwestern Kellogg Did Not Answer Bio/Vote History
Moskowitz
Tobias Moskowitz
Yale School of Management Did Not Answer Bio/Vote History
Nagel
Stefan Nagel
Chicago Booth
Agree
7
Bio/Vote History
Based on economic principles, this seems right. On the other hand, if inflation-indexed bonds were in short supply, they should trade at a premium price. But the evidence indicates that they trade at a discount. Perhaps the discount is all due to illiquidity, though.
Parker
Jonathan Parker
MIT Sloan
Agree
7
Bio/Vote History
Inflation indexed bonds reduce the need for derivatives to hedge inflation risk and so reduce leverage and complexity in the financial system. They also reduce the governments temptation to inflate away debt, although also the ability to do so in bad times.
Parlour
Christine Parlour
Berkeley Haas
Agree
7
Bio/Vote History
Philippon
Thomas Philippon
NYU Stern
Agree
8
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Agree
6
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Strongly Agree
9
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg
Agree
8
Bio/Vote History
Research has shown that the issuance of inflation-indexed bonds has a significant impact on welfare, as it provides long-term investors with a riskless long-term investment vehicle.
-see background information here
Seru
Amit Seru
Stanford GSB
Uncertain
1
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Agree
8
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs Did Not Answer Bio/Vote History
Stein
Jeremy Stein
Harvard
Agree
7
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Agree
4
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth
Agree
8
Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Agree
9
Bio/Vote History
A number of investors are likely to want to lock in a real long term return. The interesting question is why these need to be Treasury contracts, e.g., why the equivalent of TIPs are not issued by private firms.
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Agree
7
Bio/Vote History
Real bonds complete the payoff space and show up in optimal portfolios of stocks, nominal bonds, and real bonds. Very few other assets are good inflation hedges.
-see background information here
Werner
Ingrid M. Werner
OSU Fisher School Did Not Answer Bio/Vote History
Whited
Toni Whited
UMich Ross School
Uncertain
1
Bio/Vote History

Question B Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Agree
7
Bio/Vote History
When inflation expectations are high, so that nominal interest rates are high, a government that intends to fight inflation finds nominal long-term borrowing expensive. Inflation-indexed bonds then reduce borrowing costs and signal the government's resolve.
Cochrane
John Cochrane
Hoover Institution Stanford
Agree
7
Bio/Vote History
Index bonds are like debt, repay or default. Nominal bonds are like equity, can inflate away. Both are useful! Indexed/foreign debt offers precommitment, but painful default in bad times. Debt/equity, index/nominal, ex ante/ex post, bailout/moral hazard always tough questions!
Cornelli
Francesca Cornelli
Northwestern Kellogg Did Not Answer Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Uncertain
5
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Uncertain
10
Bio/Vote History
Binding a country's finances to the mast of inflation can either (a) discipline it control inflation, or (b) cause fiscal distress. Nominal debt can be a fiscal safety valve. It's not pretty, but it can in extreme cases be a way to reduce the real cost of excessive debt.
Eberly
Janice Eberly
Northwestern Kellogg Did Not Answer Bio/Vote History
Gabaix
Xavier Gabaix
Harvard
Disagree
7
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Agree
6
Bio/Vote History
Graham
John Graham
Duke Fuqua
Uncertain
7
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Uncertain
5
Bio/Vote History
This statement is only true if government had a long-term perspective. Given the long-term in the House is two years, policy makers can pass the problem off (payback of the debt) to the next generation.
Hirshleifer
David Hirshleifer
USC
Agree
6
Bio/Vote History
Hong
Harrison Hong
Columbia
Uncertain
5
Bio/Vote History
Not sure that there is any study on government commitments related to issuance of inflation protected products.
Jiang
Wei Jiang
Emory Goizueta
Agree
6
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Uncertain
3
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Disagree
7
Bio/Vote History
How about a list of all the countries that already issue indexed debt: Japan, US, Italy...
Koijen
Ralph Koijen
Chicago Booth
Uncertain
3
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Agree
4
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Agree
4
Bio/Vote History
Ludvigson
Sydney Ludvigson
NYU
Disagree
8
Bio/Vote History
recent experience in the UK leaves this open to question
Maggiori
Matteo Maggiori
Stanford GSB
Uncertain
6
Bio/Vote History
Governments have many levers to tamper with the real payoff of debt (default, taxes, financial repression). Inflation is one of these levers. Inflation-indexed bonds reduce the ability to use this lever, but at the risk of the government simply using another lever more.
Matvos
Gregor Matvos
Northwestern Kellogg Did Not Answer Bio/Vote History
Moskowitz
Tobias Moskowitz
Yale School of Management Did Not Answer Bio/Vote History
Nagel
Stefan Nagel
Chicago Booth
Agree
7
Bio/Vote History
To some extent yes, but fiscally-challenged governments in world history have been inventive in overcoming legal and technical constraints. This may limit the commitment implicit in inflation-indexed bonds issuance.
Parker
Jonathan Parker
MIT Sloan
Uncertain
8
Bio/Vote History
History is replete with examples of countries that borrow and spend their way into crises despite the extreme costs of these crises to the people. And countries that pursue inflationary policies do so for more output in the short term not less debt in the long term.
Parlour
Christine Parlour
Berkeley Haas
Disagree
7
Bio/Vote History
Philippon
Thomas Philippon
NYU Stern
Uncertain
6
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Uncertain
8
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Disagree
7
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg
Uncertain
3
Bio/Vote History
Seru
Amit Seru
Stanford GSB
Uncertain
1
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Agree
8
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs Did Not Answer Bio/Vote History
Stein
Jeremy Stein
Harvard
Uncertain
4
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Agree
3
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth
Uncertain
8
Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Uncertain
5
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Disagree
7
Bio/Vote History
Monetary policy is the remit of the Fed, not the Treasury. Price stability is important for many reasons, including keeping the debt service cost manageable. The Treasury's debt management office minimizes the cost of debt issuance; their strategy should include real bonds.
Werner
Ingrid M. Werner
OSU Fisher School Did Not Answer Bio/Vote History
Whited
Toni Whited
UMich Ross School
Uncertain
1
Bio/Vote History