Counter-cyclical fiscal policy

Nominal GDP growth indexed bonds: Business Cycle and Welfare Effects within the Framework of New Keynesian DSGE model

We examine the welfare effects of GDP-indexed bonds in a New Keynesian DSGE model. We add to a literature showing that the issuance of GDP-indexed bond may help stabilise public debt and so give more room for countercyclical fiscal policy, by conducting a careful general equilibrium welfare analysis. In a standard DSGE models, where Ricardian equivalence holds, household welfare is immune to the source of government financing. We examine how GDP-indexed bonds, rather than nominal bonds, affect welfare when Ricardian equivalence does not hold.