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Debt, Cash Flow and Inflation Incentives: A Swedish Example

In: The Debt Burden and its Consequences for Monetary Policy

Author

Listed:
  • Mats Persson

    (Stockholm University)

  • Torsten Persson

    (Stockholm University)

  • Lars E. O. Svensson

    (Stockholm University)

Abstract

Can higher inflation diminish the government debt and contribute to financing the budget deficit? And how do these public finance concerns influence inflationary expectations? These have been classic questions in macroeconomics since the seminal papers by Auemheimer (1974), Calvo (1978) and Barro (1983). The same questions recently became very relevant for several European countries in the aftermath of the 1992–3 Exchange Rate Mechanism crisis. In Sweden, our own country, the government deficit in 1994 stood at about 13 per cent of GDP.2 Increasing long bond rates and a depreciating kronor — as well as higher volatility in financial markets — were often explained by a fear that ‘politicians would lose control of government finances and resort to higher inflation as a solution.’ Developments in other countries with high debts and deficits, such as Italy or Spain, were similar.

Suggested Citation

  • 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.
    • Handle: RePEc:pal:intecp:978-1-349-26077-5_2
    DOI: 10.1007/978-1-349-26077-5_2
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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