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Is Inflation Effective for Liquidating Short-Term Nominal Debt?

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  • Guillermo A. Calvo

    (International Monetary Fund)

Abstract

The possibility of reducing the real value of domestic nonindexed government debt through inflation is studied. A central result is that this kind of debt liquidation is possible even though prices are sticky and government bonds are short term. A policy implication is that short bond maturities are no safeguard against surprise devaluations intended to lower the burden of the debt. If devaluation incentives are present, nominal nonindexed bonds could give rise to situations in which devaluations are a consequence of self-fulfilling expectations cycles.

Suggested Citation

  • 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.
  • Handle: RePEc:pal:imfstp:v:36:y:1989:i:4:p:950-960
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    Cited by:

    1. 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.
    2. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.

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