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A Vector Error Correction Model for the Relationship between Public Debt and Inflation in Germany

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  • Andreas Nastansky
  • Alexander Mehnert
  • Hans Gerhard Strohe

Abstract

In the paper, the interaction between public debt and inflation including mutual impulse response will be analysed. The European sovereign debt crisis brought once again the focus on the consequences of public debt in combination with an expansive monetary policy for the development of consumer prices. Public deficits can lead to inflation if the money supply is expansive. The high level of national debt, not only in the Euro-crisis countries, and the strong increase in total assets of the European Central Bank, as a result of the unconventional monetary policy, caused fears on inflating national debt. The transmission from public debt to inflation through money supply and long-term interest rate will be shown in the paper. Based on these theoretical thoughts, the variables public debt, consumer price index, money supply m3 and long-term interest rate will be analysed within a vector error correction model estimated by Johansen approach. In the empirical part of the article, quarterly data for Germany from 1991 by 2010 are to be examined.

Suggested Citation

  • Andreas Nastansky & Alexander Mehnert & Hans Gerhard Strohe, 2014. "A Vector Error Correction Model for the Relationship between Public Debt and Inflation in Germany," Statistische Diskussionsbeiträge 51, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
    • Handle: RePEc:pot:statdp:51
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    Cited by:

    1. Nguyen Van Bon, 2015. "The relationship between public debt and inflation in developing countries: Empirical evidence based on difference panel GMM," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 5(9), pages 128-142, September.
    2. Marc Audi & Amjad Ali, 2023. "Public Policy and Economic Misery Nexus: A Comparative Analysis of Developed and Developing World," International Journal of Economics and Financial Issues, Econjournals, vol. 13(3), pages 56-73, May.
    3. Abigail Stiglingh & Lerato Mothibi, 2019. "The link between government expenditure and debt as potential drivers of economic growth in South Africa," Proceedings of International Academic Conferences 9912043, International Institute of Social and Economic Sciences.
    4. Godwin Essang Esu,(PhD), 2023. "Fiscal Imbalances, Economic Growth and Macroeconomic Stability in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(8), pages 887-901, August.

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    More about this item

    Keywords

    Beveridge-Nelson Decomposition; Public Debt; Inflation; Money Supply; Vector Error Correction Model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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