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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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Publication status: published as Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
Handle: RePEc:nbr:nberwo:15562

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  1. Calvo, Guillermo A & Guidotti, Pablo E, 1992. "Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 895-919, November.
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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
  2. Alimenter l’inflation pour réduire la dette publique ?
    by ? in D'un champ l'autre on 2014-06-14 17:29:00
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