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The Procyclicality of Inflation-Linked Debt

This paper uses UK time-series data to document that the ratio of inflation-linked debt to total public debt (“linker share”) is procyclical. The business cycle properties of the linker share indicate a positive relationship with inflation, even after controlling for breakeven inflation. This can be explained by the tax-smoothing incentives of the government in a simple Ramsey model. Results are similar for the US.