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Inflation Implications of Rising Government Debt

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Author Info
Giannitsarou, Chryssi
Scott, Andrew

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Abstract

The intertemporal budget constraint of the government implies a relationship between a ratio of current liabilities to the primary deficit with future values of inflation, interest rates, GDP and narrow money growth and changes in the primary deficit. This relationship defines a natural measure of fiscal balance and can be used as an accounting identity to examine the channels through which governments achieve fiscal sustainability. We evaluate the ability of this framework to account for the fiscal behaviour of six industrialised nations since 1960. We show how fiscal imbalances are mainly removed through adjustments in the primary deficit (80-100%), with less substantial roles being played by inflation (0-10%) and GDP growth (0-20%). Focusing on the relation between fiscal imbalances and inflation suggests extremely modest interactions. This post WWII evidence suggests that the widely anticipated future increases in fiscal deficits, need not necessarily have a substantial impact on inflation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5961.

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Date of creation: Nov 2006
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Related research
Keywords: fiscal deficit fiscal sustainability government debt inflation intertemporal budget constraint

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
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  6. Bohn, H., 1991. "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Weiss Center Working Papers 3-91, Wharton School - Weiss Center for International Financial Research.
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  7. Bergin, Paul R & Sheffrin, Steven M, 2000. "Interest Rates, Exchange Rates and Present Value Models of the Current Account," Economic Journal, Royal Economic Society, vol. 110(463), pages 535-58, April. [Downloadable!] (restricted)
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  14. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06. [Downloadable!] (restricted)
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  16. Wickens, M. R. & Uctum, Merih, 1993. "The sustainability of current account deficits : A test of the US intertemporal budget constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 423-441, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Ananda Jayawickrama & Tilak Abeysinghe, 2006. "Sustainability Of Fiscal Deficits: The U.S. Experience 1929-2004," SCAPE Policy Research Working Paper Series 05xx, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
  3. Hasko, Harri, 2007. "‘Some unpleasant fiscal arithmetic’: the role of monetary and fiscal policy in public debt dynamics since the 1970s," Research Discussion Papers 28/2007, Bank of Finland. [Downloadable!]
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