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Is high debt constraining monetary policy? Evidence from inflation expectations

Author

Listed:
  • Luis Brandao-Marques
  • Marco Casiraghi
  • Gaston Gelos
  • Olamide Harrison
  • Güneş Kamber

Abstract

This paper examines whether high public debt levels pose a challenge to containing inflation. It does so by assessing the impact of public debt surprises on inflation expectations in advanced and Emerging Market Economies. It finds that debt surprises raise long-term inflation expectations in Emerging Market Economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in countries with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in Emerging Market Economies with high and dollarized debt levels, and weaker monetary policy frameworks.

Suggested Citation

  • Luis Brandao-Marques & Marco Casiraghi & Gaston Gelos & Olamide Harrison & Güneş Kamber, 2023. "Is high debt constraining monetary policy? Evidence from inflation expectations," BIS Working Papers 1141, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1141
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    Cited by:

    1. Beckmann, Joscha & Czudaj, Robert L., 2024. "Uncertainty Shocks and Inflation: The Role of Credibility and Expectation Anchoring," MPRA Paper 119971, University Library of Munich, Germany.
    2. Andryushin, S., 2024. "Interest rate policy of the Bank of Russia in conditions of fiscally-dominant regime: Risks and prospects," Journal of the New Economic Association, New Economic Association, vol. 62(1), pages 211-219.

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    More about this item

    Keywords

    inflation expectations; monetary policy; fiscal dominance; debt;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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