Authors: Ed Westerhout, Ona Ciocyte
Published: March, 2017

The market for inflation-linked bonds (ILBs) is growing, but still small when compared to the market for nominal bonds. This paper raises the question why governments do not rely more on ILBs to finance their public debts?

The obvious starting point for an analysis of ILBs is that they protect investors from the risk of inflation. ILBs are also known to be relatively illiquid, however. This paper derives that the average rate of return on ILBs can therefore be lower or higher than the one on corresponding nominal bonds.

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