Comment.

This article comments on a paper by John Y. Campbell and Robert J. Shiller about the introduction of indexed government bonds in the U.S. The authors believe that the three frequently mentioned objections to the issue of indexed bonds are exaggerated. First, the fear that protecting the public against inflation would reduce the political pressures to fight inflation would be outweighed by the sleeping policeman effect, policymakers would know that higher inflation would be penalized by higher nominal debt payments. Second, the markets would not balkanize meaning that the introduction of indexed bonds would not spoil the market for nominal bonds. Third, the problem of how to tax indexed bonds can be overcome by taxing only the nominal component of interest. On yield, the authors have difficulty establishing that the yield on indexed bonds will be below that on nominal bonds. In a general equilibrium context, the introduction of indexed bonds may make possible intergenerational risk sharing that could only imply a lower equilibrium rate of return than that on nominal bonds. It is necessary to consider two complications. First, the practical difficulties of whether there is anything special about a long-term inflation hedge.