Liability management with inflation-linked products: The cases of Sweden, France and Italy
Jean-Paul Renne and Nicolas Sagnes presents the quantitative methodology aimed at assessing the cost and risk impact of a change in the share of inflation-indexed debt. They consider both interest cost and budget balance and use a wide range of econometric tools to model the French economy and the dynamics of budget balance. Based on this quantitative analysis, they come up with the following results: by saving the inflation risk premium, the government can lower the average debt service when increasing the share of indexed debt, but if the increase is strong, it also makes the debt service more variable. However, the conclusion is also that, starting from 0%, increasing indexed debt up to a moderate level (around 20%) would lead to a decrease in expected interest payments without significantly increasing the variability of the budget balance.