Inflation and Public Debt Reversals in the G7 Countries
This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points over the next five years. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debt-to-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japanâ€™s experience in the last few decades. In addition, un-anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lowerâ€“income households.
|Date of creation:||10 Jun 2014|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carmen M. & M. Belen Sbrancia, 2011.
"The Liquidation of Government Debt,"
Working Paper Series
WP11-10, Peterson Institute for International Economics.
- Carmen M. Reinhart & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," NBER Working Papers 16893, National Bureau of Economic Research, Inc.
- Carmen Reinhart & M. Belen Sbrancia, 2015. "The Liquidation of Government Debt," IMF Working Papers 15/7, International Monetary Fund.
- Carmen M. Reinhart & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," BIS Working Papers 363, Bank for International Settlements.
- Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1, 07.
- Aizenman, Joshua & Marion, Nancy, 2009.
"Using Inflation to Erode the U.S. Public Debt,"
Santa Cruz Department of Economics, Working Paper Series
qt6xf174rs, Department of Economics, UC Santa Cruz.
- S. M. Ali Abbas & Bernardin Akitoby & Jochen R. Andritzky & Helge Berger & Takuji Komatsuzaki & Justin Tyson, 2013. "Dealing with High Debt in an Era of Low Growth," IMF Staff Discussion Notes 13/7, International Monetary Fund.
- George J. Hall & Thomas J. Sargent, 2011.
"Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 3(3), pages 192-214, July.
- George J. Hall & Thomas J. Sargent, 2010. "Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics," Working Papers 01, Brandeis University, Department of Economics and International Businesss School.
- George J. Hall & Thomas J. Sargent, 2010. "Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics," NBER Working Papers 15702, National Bureau of Economic Research, Inc.
- Thomas J. Sargent & George J. Hall, 2010. "Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics," 2010 Meeting Papers 208, Society for Economic Dynamics.
- Giovanni Dell'Ariccia & Olivier J. Blanchard & Paolo Mauro, 2010.
"Rethinking Macroeconomic Policy,"
IMF Staff Position Notes
2010/03, International Monetary Fund.
- Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
- Cochrane, John H., 2011.
"Understanding policy in the great recession: Some unpleasant fiscal arithmetic,"
European Economic Review,
Elsevier, vol. 55(1), pages 2-30, January.
- John H. Cochrane, 2010. "Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic," NBER Working Papers 16087, National Bureau of Economic Research, Inc.
- Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-76, June.
- Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank, Research Centre.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:14/96. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.