Advanced Search
MyIDEAS: Login to save this paper or follow this series

Public Debt, Money Supply, and Inflation

Contents:

Author Info

  • Goohoon Kwon
  • Lavern McFarlane
  • Wayne Robinson

Abstract

This paper provides comprehensive empirical evidence that supports the predictions of Sargent and Wallace''s (1981) "unpleasant monetarist arithmetic" that an increase in public debt is typically inflationary in countries with large public debt. Drawing on an extensive panel dataset, we find that the relationship holds strongly in indebted developing countries, weakly in other developing countries, but generally not in developed economies. These results are robust to the inclusion of other variables, corrections for endogeneity biases, and relaxation of common-slope restrictions and are invariant over sub-sample periods. We estimate a VAR to trace out the transmission channel and find the impulse responses consistent with the predictions of a forward-looking model of inflation. Wealth effects of public debt could also affect inflation, as posited by the fiscal theory of the price level, but we do not find supportive evidence. The results suggest that the risk of a debt-inflation trap is significant in highly indebted countries, and pure money-based stabilization is unlikely to be effective over the medium term. Our findings stress the importance of institutional and structural factors in the link between fiscal policy and inflation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=19133
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/121.

as in new window
Length: 39
Date of creation: 01 May 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/121

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Public debt; Economic models; inflation; money supply; price level; monetary policy; money growth; central bank; quantity theory of money; monetary economics; money demand; quantity theory; theory of money; monetary fund; aggregate demand; rising inflation; price stability; high inflation; inflation dynamics; nominal interest rates; inflation targeting; real output; average inflation; increase in inflation; monetary data; monetary aggregate; inflation money; monetary response; monetary financing; long-term interest rates; rational expectations; rise in inflation; monetary phenomenon; low inflation; monetary model; inflation forecasts; real money; monetary models; monetary growth; discount rate; high inflations; high inflation episodes; reduction of inflation; percent inflation; real interest rate; real discount rate; monetarism; lower inflation; demand for money; real interest rates; annual inflation; monetary arrangement; monetary aggregates; macroeconomic performance;

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Pedro Teles & Harald Uhlig, 2010. "Is Quantity Theory Still Alive?," NBER Working Papers 16393, National Bureau of Economic Research, Inc.
  2. Anoop Singh, 2006. "Macroeconomic Volatility," IMF Working Papers 06/166, International Monetary Fund.
  3. Judit Krekó & Csaba Balogh & Kristóf Lehmann & Róbert Mátrai & György Pulai & Balázs Vonnák, 2013. "International experiences and domestic opportunities of applying unconventional monetary policy tools," MNB Occasional Papers 2013/100, Magyar Nemzeti Bank (the central bank of Hungary).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:06/121. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.