This paper examines the benefit of diversifying sovereign debt issuance through greater reliance on inflation-indexed bonds for an emerging economy, Colombia. Using an arbitragefree dynamic term structure model of fixed-coupon and inflation-indexed bond prices, we account for inflation and liquidity risk premia and calculate the forward-looking net benefit of issuing inflation-indexed bonds over nominal bonds. Our results suggest that the Colombian government could lower its funding costs through increased issuance of inflation-indexed debt and more so at longer maturities, in particular in periods when inflation is elevated.
Suggested citation:
Cardozo, Cristhian Hernando Ruiz, and Jens Henrik Eggert Christensen. 2026. “The Benefit of Inflation-Indexed Debt: Evidence from an Emerging Bond Market.” Federal Reserve Bank of San Francisco Working Paper 2023-04.
https://doi.org/10.24148/wp2023-04