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Debt Erosion and the Market Process

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  • Alexander William Salter

Abstract

This paper explores the effects of debt erosion on the market process. Debt erosion is the attempt by government to lower the real value of its debt through the creation of unexpected inflation. In addition to the costs recognised by most economists, debt erosion through unexpected inflation can impair the price system's ability to coordinate exchange activity and can result in costly capital misallocations. This is because the creation of unexpected inflation implies disequilibrium in the money market. To avoid the harm from such monetary shocks, this paper suggests a separation between money and state, enshrined in an explicit rule at the constitutional level.

Suggested Citation

  • Alexander William Salter, 2014. "Debt Erosion and the Market Process," Economic Affairs, Wiley Blackwell, vol. 34(3), pages 370-378, October.
    • Handle: RePEc:bla:ecaffa:v:34:y:2014:i:3:p:370-378
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    File URL: http://hdl.handle.net/10.1111/ecaf.12092
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    References listed on IDEAS

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    1. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    2. George A. Selgin & Lawrence H. White, 1994. "How Would the Invisible Hand Handle Money?," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1718-1749, December.
    3. Peter Ordeshook, 1992. "Constitutional stability," Constitutional Political Economy, Springer, vol. 3(2), pages 137-175, March.
    4. Horwitz, Steven, 2011. "Do we need a distinct monetary constitution?," Journal of Economic Behavior & Organization, Elsevier, vol. 80(2), pages 331-338.
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    Cited by:

    1. Peter J. Boettke & Alexander W. Salter & Daniel J. Smith, 2018. "Money as meta-rule: Buchanan’s constitutional economics as a foundation for monetary stability," Public Choice, Springer, vol. 176(3), pages 529-555, September.

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