Inflating Away the Public Debt? An Empirical Assessment
We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected infl ation can lower the real value of outstand- ing government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for infl ation at differ- ent horizons. The estimates suggest that it is unlikely that infl ation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead in flation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.
|Date of creation:||Jul 2014|
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