IDEAS home Printed from https://ideas.repec.org/a/eee/jmacro/v33y2011i4p524-541.html
   My bibliography  Save this article

Using inflation to erode the US public debt

Author

Listed:
  • 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.

Suggested Citation

  • 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:eee:jmacro:v:33:y:2011:i:4:p:524-541
    DOI: 10.1016/j.jmacro.2011.09.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0164070411000620
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmacro.2011.09.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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(1), pages 47-68, March.
    2. 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.
    3. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    4. 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.
    5. Matthias Doepke, "undated". "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers 412, UCLA Department of Economics.
    6. Mats Persson & Torsten Persson & Lars E. O. Svensson, 1998. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," International Economic Association Series, in: Guillermo Calvo & Mervyn King (ed.), The Debt Burden and its Consequences for Monetary Policy, chapter 2, pages 28-66, Palgrave Macmillan.
    7. Guillermo Calvo & Mervyn King (ed.), 1998. "The Debt Burden and its Consequences for Monetary Policy," International Economic Association Series, Palgrave Macmillan, number 978-1-349-26077-5.
    8. 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.
    9. 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.
    10. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
    11. 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.
    12. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    13. 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.
    14. 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.
    15. 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.
    16. 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, vol. 13(Mar), pages 53-71.
    17. Benjamin M. Friedman, 1985. "Recent Perspectives in and on Macroeconomics," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Issues in Contemporary Macroeconomics and Distribution, chapter 11, pages 270-286, Palgrave Macmillan.
    18. International Monetary Fund, 1989. "Is Inflation Effective for Liquidating Short-Term Nominal Debt?," IMF Working Papers 1989/002, International Monetary Fund.
    19. Benjamin M. Friedman, 1983. "Recent Perspectives in and on Macroeconomics," NBER Working Papers 1208, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jens Hilscher & Alon Raviv & Ricardo Reis, 2022. "Inflating Away the Public Debt? An Empirical Assessment [Crisis and commitment: Inflation credibility and the vulnerability to sovereign debt crises]," Review of Financial Studies, Society for Financial Studies, vol. 35(3), pages 1553-1595.
    2. Leeper, E.M. & Leith, C., 2016. "Understanding Inflation as a Joint Monetary–Fiscal Phenomenon," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2305-2415, Elsevier.
    3. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
    4. Reinhart, Carmen M. & Reinhart, Vincent & Rogoff, Kenneth, 2015. "Dealing with debt," Journal of International Economics, Elsevier, vol. 96(S1), pages 43-55.
    5. Matthias Doepke, "undated". "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers 412, UCLA Department of Economics.
    6. Basil Dalamagas & Stefanos Tantos, 2017. "Optimal Sovereign Debt for an Overdebted Country," Australian Economic Papers, Wiley Blackwell, vol. 56(2), pages 95-118, June.
    7. Ichiro Fukunaga & Takuji Komatsuzaki & Hideaki Matsuoka, 2022. "Inflation and public debt reversals in advanced economies," Contemporary Economic Policy, Western Economic Association International, vol. 40(1), pages 124-137, January.
    8. Juan Equiza Goni, 2014. "Sovereign Debt Maturity and Debt-to GDP Dynamics in Six Euro Area Countries," Working Papers ECARES ECARES 2014-44, ULB -- Universite Libre de Bruxelles.
    9. Césaire A. Meh & Yaz Terajima, 2011. "Inflation, nominal portfolios, and wealth redistribution in Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(4), pages 1369-1402, November.
    10. Equiza-Goñi, Juan, 2016. "Government debt maturity and debt dynamics in euro area countries," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 292-311.
    11. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482, Elsevier.
    12. Bernardin Akitoby & Ariel Binder & Takuji Komatsuzaki, 2017. "Inflation and Public Debt Reversals in the G7 Countries," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(7), pages 5-27, May.
    13. Reda Cherif & Fuad Hasanov, 2018. "Public debt dynamics: the effects of austerity, inflation, and growth shocks," Empirical Economics, Springer, vol. 54(3), pages 1087-1105, May.
    14. Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2010. "Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 637-652, September.
    15. Basil Dalamagas & Stefanos Tantos, 2016. "Optimal Versus Actual Maturity of Government Debt: The Case of Greece," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(3), pages 25-52, July-Sept.
    16. Phouthanouphet Saysombath, 2014. "An Examination of the Causal Relationship between Budget Deficit and Inflation: a Case Study of Lao PDR," Journal of Social and Development Sciences, AMH International, vol. 5(2), pages 43-49.
    17. Efraim Sadka & Assaf Razin, 1996. "Fiscal Balance During Inflation, Disinflation, and Immigration: Policy Lessons," IMF Working Papers 1996/033, International Monetary Fund.
    18. Césaire A. Meh & Yaz Terajima, 2011. "Inflation, nominal portfolios, and wealth redistribution in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 44(4), pages 1369-1402, November.
    19. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 134, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    20. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "The Forgotten History of Domestic Debt," Economic Journal, Royal Economic Society, vol. 121(552), pages 319-350, May.

    More about this item

    Keywords

    Inflation; Public debt; Debt overhang; Debt maturity;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:33:y:2011:i:4:p:524-541. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/622617 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622617 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.