Using Inflation to Erode the U.S. Public Debt
AbstractAs a share of GDP, the U.S. Federal debt held by the public exceeds 50 percent in FY2009, the highest debt ratio since 1955. Projections indicate the debt ratio may be in the 70- 100 percent range within ten years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade. Yet there are some important differences â€“shorter debt maturities today reduce the temptation to inflate, while the larger share held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the U.S. debt overhang may trigger an increase in inflation of about 5 percent for several years. This additional inflation would significantly reduce the debt ratio, even with some shortening of debt maturities.
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Bibliographic InfoPaper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt6xf174rs.
Date of creation: 01 Nov 2009
Date of revision:
Social and Behavioral Sciences;
Other versions of this item:
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- H6 - Public Economics - - National Budget, Deficit, and Debt
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
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by ? in D'un champ l'autre on 2014-06-14 17:29:00
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