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Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations

Author

Listed:
  • Mr. Luis Brandão-Marques
  • Marco Casiraghi
  • Mr. Gaston Gelos
  • Olamide Harrison
  • Mr. Güneş Kamber

Abstract

This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government 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 economies 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

  • Mr. Luis Brandão-Marques & Marco Casiraghi & Mr. Gaston Gelos & Olamide Harrison & Mr. Güneş Kamber, 2023. "Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations," IMF Working Papers 2023/143, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/143
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    Cited by:

    1. Kronick, Jeremy & Petersen, Luba, 2025. "Is monetary and fiscal policy conflict that dire?," Journal of Economic Dynamics and Control, Elsevier, vol. 172(C).
    2. David, Antonio C. & Pienknagura, Samuel & Yépez, Juan F., 2025. "Can fiscal consolidations announcements help anchor inflation expectations?," Journal of International Money and Finance, Elsevier, vol. 151(C).
    3. Beirne, John & Renzhi, Nuobu, 2024. "Debt shocks and the dynamics of output and inflation in emerging economies," Journal of International Money and Finance, Elsevier, vol. 148(C).
    4. Beckmann, Joscha & Czudaj, Robert L., 2026. "Uncertainty shocks and inflation: The role of credibility and expectation anchoring," Journal of International Money and Finance, Elsevier, vol. 160(C).
    5. Philippe Andrade & Erwan Gautier & Eric Mengus & Emanuel Moench, 2025. "Household Beliefs about Fiscal Dominance," Working Papers 25-2, Federal Reserve Bank of Boston.
    6. Acedański, Jan & Dąbrowski, Marek A., 2024. "Looking behind the facade of the Feldstein-Horioka puzzle," MPRA Paper 122800, University Library of Munich, Germany.
    7. Swapan-Kumar Pradhan & Elod Takats & Judit Temesvary, 2024. "How does fiscal policy affect the transmission of monetary policy into cross-border bank lending? Cross-country evidence," BIS Working Papers 1226, Bank for International Settlements.
    8. 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.
    9. Fiorella De Fiore & Marco Jacopo Lombardi & Albert Pierres Tejada, 2024. "Fiscal stimulus plans and households' expectations," BIS Working Papers 1238, Bank for International Settlements.

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    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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