Index-linked bonds from an academic, market and policy-making standpoint

Traditionally, index-linked bonds have been conceived and studied as an instrument for living with high and potentially rising inflation. The points of view associated with the conventional wisdom continue to prevail, even though some of the traditional premises have changed radically . The aim o f this chapter is to re-examine the question, renewing, and updating considerations the authors have already expressed in favour of the issue of index-linked government bonds by leading industrial countries and notably by Italy. The general increase of long-term interest rates in 1994 contains a warning for every country. The use of long-term bonds with fixed nominal rates may prove to be destabilizing because if the feared resurgence of inflation does not occur, the interest paid will turn from nominal into real, thereby perpetuating difficulties in restoring public finances.