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Using inflation to erode the US public debt

Author Info

Listed author(s):
  • Aizenman, Joshua
  • Marion, Nancy

Abstract

Projections indicate the US Federal debt held by the public may exceed 70–100% of GDP within 10years. 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%. Inflation reduced this ratio by more than a third within a decade. Yet there are some important differences – shorter debt maturities today reduce the temptation to inflate, while the larger share of debt 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 US debt overhang may induce an increase in inflation of about 5% for several years that could significantly reduce the debt ratio.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 33 (2011)
Issue (Month): 4 ()
Pages: 524-541

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Handle: RePEc:eee:jmacro:v:33:y:2011:i:4:p:524-541
DOI: 10.1016/j.jmacro.2011.09.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

Keywords: Inflation; Public debt; Debt overhang; Debt maturity;

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Find related papers by JEL classification:
  • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
  • H6 - Public Economics - - National Budget, Deficit, and Debt

References listed on IDEAS
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  1. Calomiris, Charles W., 1988. "Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental," The Journal of Economic History, Cambridge University Press, vol. 48(01), pages 47-68, March.
  2. Mats Persson & Torsten Persson & Lars E. O. Svensson, 1996. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," NBER Working Papers 5772, National Bureau of Economic Research, Inc.
  3. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-319, March.
  4. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
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  6. Kenneth D. Garbade, 2007. "The emergence of "regular and predictable" as a Treasury debt management strategy," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 53-71.
  7. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  8. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
  9. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
  10. Matthias Doepke, "undated". "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers 412, UCLA Department of Economics.
  11. 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.
  12. Menzie Chinn & Jeffrey Frankel, 2008. "Why the Euro Will Rival the Dollar," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(3), pages 255-278, September.
  13. Benjamin M. Friedman, 1983. "Recent Perspectives in and on Macroeconomics," NBER Working Papers 1208, National Bureau of Economic Research, Inc.
  14. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  15. 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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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  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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