Using Inflation to Erode the U.S. Public Debt
As a share of GDP, the U.S. Federal debt held by the public exceeds 50 percent in FY2009, the highest debt ratio since 1955. Projections indicate the debt ratio may be in the 70-100 percent range within ten years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade. Yet there are some important differences -shorter debt maturities today reduce the temptation to inflate, while the larger share held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the U.S. debt overhang may trigger an increase in inflation of about 5 percent for several years. This additional inflation would significantly reduce the debt ratio, even with some shortening of debt maturities.
|Date of creation:||Dec 2009|
|Date of revision:|
|Publication status:||published as Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- Missale, Alessandro & Blanchard, Olivier Jean, 1994.
"The Debt Burden and Debt Maturity,"
American Economic Review,
American Economic Association, vol. 84(1), pages 309-19, March.
- Menzie Chinn & Jeffrey Frankel, 2008.
"Why the Euro Will Rival the Dollar,"
Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(3), pages 255-278, September.
- Carmen M. Reinhart & M. Belen Sbrancia, 2011.
"The Liquidation of Government Debt,"
BIS Working Papers
363, Bank for International Settlements.
- Carmen Reinhart & M. Belen Sbrancia, 2015. "The Liquidation of Government Debt," IMF Working Papers 15/7, International Monetary Fund.
- 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.
- Calomiris, Charles W., 1988. "Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental," The Journal of Economic History, Cambridge University Press, vol. 48(01), pages 47-68, March.
- Calvo, Guillermo A & Guidotti, Pablo E, 1992. "Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 895-919, November.
- Bruno, Michael & Easterly, William, 1995.
"Inflation crises and long-run growth,"
Policy Research Working Paper Series
1517, The World Bank.
- Benjamin M. Friedman, 1983. "Recent Perspectives in and on Macroeconomics," NBER Working Papers 1208, National Bureau of Economic Research, Inc.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- Matthias Doepke & Martin Schneider, 2006.
"Inflation as a Redistribution Shock: Effects on Aggregates and Welfare,"
NBER Working Papers
12319, National Bureau of Economic Research, Inc.
- Doepke, Matthias & Schneider, Martin, 2006. "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," CEPR Discussion Papers 5939, C.E.P.R. Discussion Papers.
- Matthias Doepke, . "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers 412, UCLA Department of Economics.
- Martin Feldstein, 1995.
"Tax Avoidance and the Deadweight Loss of the Income Tax,"
NBER Working Papers
5055, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
- Persson, Mats & Persson, Torsten & Svensson, Lars E.O., 1997.
"Debt, cash flow and inflation incentives: A Swedish example,"
613, Stockholm University, Institute for International Economic Studies.
- Persson, M & Persson, T & Svensson, L-E-O, 1996. "Debt, Cash Flow and Inflation Incentives : A Swedish Example," Papers 613, Stockholm - International Economic Studies.
- Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1996. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," CEPR Discussion Papers 1488, C.E.P.R. Discussion Papers.
- Mats Persson & Torsten Persson & Lars E. O. Svensson, 1996. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," NBER Working Papers 5772, National Bureau of Economic Research, Inc.
- Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
- Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
- Kenneth D. Garbade, 2007. "The emergence of "regular and predictable" as a Treasury debt management strategy," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 53-71.
- Guillermo A. Calvo, 1989. "Is Inflation Effective for Liquidating Short-Term Nominal Debt?," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 950-960, December.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:15562. 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: ()
If references are entirely missing, you can add them using this form.