Conditional Indexation Bias in Yields Reported on Inflation-Indexed Securities with Special Reference to UDIBONOS and TIPS

The real rate of return on inflation-indexed government securities is calculated and published as if indexation succeeded perfectly in keeping the real value of coupon and principal payments unchanged. In fact the procedure of indexing to the lagged momentum of the seasonally unadjusted CPI gives rise to three types of indexation bias that may change the expected real value of the future stream of payments in relation to the current par value. These biases are due to i) seasonality, ii) non-seasonal fluctuations in reported inflation rates, and iii) any expected “permanent” changes in future rates of inflation (or the reporting thereof) being capable of creating predictable changes in the real value of the inflation-adjusted principal with the indexation procedure actually in force. They are one more, directly quantifiable, reason why the reported yields do not provide the long-sought definite revelation of the riskless real rate of interest and hence of the expected rate of inflation by comparison with nominal interest rates.

Solving Ramsey Problems with Nonlinear Projection Methods

This paper applies nonlinear projection methods to solve Ramsey problems in a stochastic monetary economy. The presence of nonlinear distortions in the Ramsey problem requires the use of a solution procedure which captures these effects. The nonlinear projection method, even with low-order Chebyshev polynomials as employed in this paper, is able to capture a significant portion of the Jensen's inequality effects. As an example of the usefulness of nonlinear projection methods, we examine Barro's (1987, 1979) conjecture that welfare gains are available from policy smoothing with debt. Increases in the volatility of distortionary monetary policy are more than offset by declines in the volatility of distortionary labor taxes so that introduction of debt is welfare enhancing.

Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt

This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.Economic models;money growth, inflation, government spending, government budget, monetary policy, price level, budget constraint, government budget constraint, taxation, government spending shocks, real value, nominal interest rate, government revenue, tax revenue, monetary economics, money supply, tax policy, real interest rate, increase in consumption, public finance, public debt, stock of money, tax rates, fiscal policy, tax burden, money stock, rate of inflation, government budget constraints, printing money, debt service, tax income, government expenditures, budget deficits, real interest rates, taxes on labor, inflation stabilization, budget constraints

Fiscal Sustainability in Remittance-Dependent Economies

We investigate the impact of remittances on public debt sustainability and detail how the traditional debt-to-GDP ratio can be modified to create a more accurate representation of debt sustainability for a country that receives significant remittance inflows. The main result is that inclusion of remittances into the traditional debt sustainability analysis alters the amount of fiscal adjustment required to place debt on a sustainable path. While preliminary, these results are indicative of how a one-size-fits-all stability analysis may be inappropriate when evaluating the stance of fiscal policy for countries with different balance of payments characteristics.Fiscal sustainability;Capital inflows;Debt burden;Debt sustainability;Developing countries;Economic models;Fiscal management;Gross domestic product;Private savings;Public debt;Workers remittances;remittances, growth rate, remittance, growth rate of remittances, real gdp, gdp growth, remittance flows, remittance inflows, impact of remittances, workers ? remittances, growth rates, gdp growth rate, migration, growth of remittances, effects of remittances, gdp growth rates, decline in remittances, role of remittances, gdp deflator, remittance outflows, capital flows, economic implications of remittances, benefits of remittances, remittance-receiving households, net remittance, immigrant remittance, recipients of remittances

The Contingent Claims Approach to Corporate Vulnerability Analysis

In this paper, we examine the ability of the contingent claims approach (CCA) to identify corporate sector and economy-wide vulnerabilities. We apply the Moody''s MfRisk model, which uses aggregated CCA principles, to assess vulnerabilities retroactively in two historical country cases. The results indicate that the method may prove helpful in identifying corporate sector vulnerabilities and estimating the associated value of risk transfer across interrelated balance sheets of the corporate, financial, and public sectors.Credit risk;Risk premium;Financial sector;Economic models;option pricing, capital markets, hedging, international capital markets, capital outflows, financial market, hedge, international capital, capital structure, derivative, capital inflows, financial institutions, equity prices, financial system, access to international capital, debt service, bondholders, financial markets, present value, derivative securities, bond, capital controls, access to international capital markets, stock exchange, hedge portfolio, capital flows, international reserves, currency hedge, bond prices, external capital, put options, derivative security, bonds, private capital flows, capital adequacy, hedges, convertible securities, forward contract, derivative markets, discounted present value, capital account liberalization, portfolio investment, stock price, nominal exchange rate, spot market, subsidiaries, risk-free interest rate, derivative market, credit derivatives, movements in interest rates, equity markets, private capital, deposit insurance, credit rating, currency crisis, financial statements, call options, management techniques, securities clearing, financial volatility, equity financing, mature markets, default-free bond, bond price, currency crises, credit rating agencies, equity ratio, equity market