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Inflation Implications of Rising Government Debt

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  • Giannitsarou, Chryssi
  • Scott, Andrew

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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Handle: RePEc:cpr:ceprdp:5961

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Keywords: fiscal deficit; fiscal sustainability; government debt; inflation; intertemporal budget constraint;

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References

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  1. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 28-89, Wharton School Rodney L. White Center for Financial Research.
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Citations

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Cited by:
  1. Polito, Vito & Wickens, Mike, 2012. "A model-based indicator of the fiscal stance," European Economic Review, Elsevier, vol. 56(3), pages 526-551.
  2. Bohn, Henning, 2010. "The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk," University of California at Santa Barbara, Economics Working Paper Series qt7kz6v3zs, Department of Economics, UC Santa Barbara.
  3. Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank, Research Centre.
  4. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
  5. Nawaz, Muhammad & Iqbal, Muhammad Mazhar & Ali, Amanat & Zaman, Khalid, 2012. "Fiscal Theory of Price Level: A Panel Data Analysis for selected Saarc Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 152-170, September.
  6. Nicholas Apergis & Arusha Cooray, 2013. "Forecasting fiscal variables: Only a strong growth plan can sustain the Greek austerity programs-Evidence from simultaneous and structural models," CAMA Working Papers 2013-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Kliem, Martin & Kriwoluzky, Alexander & Sarferaz, Samad, 2013. "On the low-frequency relationship between public deficits and inflation," Discussion Papers 12/2013, Deutsche Bundesbank, Research Centre.
  8. Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc.
  9. 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.
  10. Ananda Jayawickrama & Tilak Abeysinghe, 2006. "Sustainability of Fiscal Deficits : The US Experience 1929-2004," Governance Working Papers 21924, East Asian Bureau of Economic Research.
  11. Joshua Mason and Arjun Jayadev, . "Fisher Dynamics in Household Debt: The Case of the U.S. 1929-2011," Working Papers 13, University of Massachusetts Boston, Economics Department.
  12. Bertola, Giuseppe, 2010. "Fiscal Policy and Labor Markets at Times of Public Debt," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8037, C.E.P.R. Discussion Papers.
  13. Rodolfo Mendez-Marcano & Jose Pineda, 2014. "Fiscal Sustainability and Economic Growth in Bolivia," Working Papers 1406, BBVA Bank, Economic Research Department.

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