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Using Inflation to Erode the U.S. Public Debt

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  • Joshua Aizenman
  • Nancy Marion

Abstract

As 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 –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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15562.

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Date of creation: Dec 2009
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Handle: RePEc:nbr:nberwo:15562

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  1. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  2. George J. Hall & Thomas J. Sargent, 2010. "Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics," Working Papers 01, Brandeis University, Department of Economics and International Businesss School.
  3. Carmen M. & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," Working Paper Series WP11-10, Peterson Institute for International Economics.
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  8. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  9. Benjamin M. Friedman, 1985. "Recent Perspectives in and on Macroeconomics," NBER Working Papers 1208, National Bureau of Economic Research, Inc.
  10. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  11. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  12. Guillermo A. Calvo, 1989. "Is Inflation Effective for Liquidating Short-Term Nominal Debt?," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 950-960, December.
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  1. Grèce: la sortie de l'euro est proche...
    by contact@captaineconomics.fr (Le Captain') in Captain Economics on 2012-05-08 11:13:42
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Cited by:
  1. George J. Hall & Thomas J. Sargent, 2011. "Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 192-214, July.
  2. Belke, Ansgar & Schnabl, Gunther, 2010. "Finanzkrise, globale Liquidität und makroökonomischer Exit," IBES Diskussionsbeiträge 184, University of Duisburg-Essen, Faculty for Economics and Business Administration.
  3. Ansgar Belke & Niklas Potrafke, 2009. "Does Government Ideology Matter in Monetary Policy? – A Panel Data Analysis for OECD Countries," Ruhr Economic Papers 0094, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  4. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1044-1078.
  5. Guillermo A. Calvo, 2012. "The Price Theory of Money, Prospero's Liquidity Trap, and Sudden Stop: Back to Basics and Back," NBER Working Papers 18285, National Bureau of Economic Research, Inc.
  6. Vivekanand Jayakumar & Barbara Weiss, 2011. "Global reserve currency system: Why will the dollar standard give way to a tripolar currency order?," Frontiers of Economics in China, Springer, vol. 6(1), pages 92-130, March.
  7. Fuad Hasanov & Reda Cherif, 2012. "Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks," IMF Working Papers 12/230, International Monetary Fund.
  8. Reda, Cherif & Fuad, Hasanov, 2010. "Public Debt Dynamics and Debt Feedback," MPRA Paper 27918, University Library of Munich, Germany.
  9. Niemann, Stefan & Pichler, Paul, 2011. "Optimal fiscal and monetary policies in the face of rare disasters," European Economic Review, Elsevier, vol. 55(1), pages 75-92, January.
  10. Kitchen, John & Chinn, Menzie, 2010. "Financing U.S. debt: Is there enough money in the world – and at what cost?," MPRA Paper 24736, University Library of Munich, Germany.
  11. Dániel Felcser & Kristóf Lehmann, 2012. "The Fed’s inflation target and the background of its announcement," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 7(3), pages 28-37, October.

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