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Inflating Away the Public Debt? An Empirical Assessment

Author

Listed:
  • Jens Hilscher

    (International Business School, Brandeis University)

  • Alon Raviv

    (Brandeis University)

  • Ricardo Reis

    (Columbia University)

Abstract

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.

Suggested Citation

  • Jens Hilscher & Alon Raviv & Ricardo Reis, 2014. "Inflating Away the Public Debt? An Empirical Assessment," Working Papers 74, Brandeis University, Department of Economics and International Businesss School.
  • Handle: RePEc:brd:wpaper:74
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    More about this item

    Keywords

    inflation options; maturity of government debt; copulas; required reserves.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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