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A Vector Error Correction Model for the Relationship between Public Debt and Inflation in Germany

  • Andreas Nastansky
  • Alexander Mehnert
  • Hans Gerhard Strohe
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    In the paper, the interaction between public debt and inflation including mutual impulse response will be analysed. The European sovereign debt crisis brought once again the focus on the consequences of public debt in combination with an expansive monetary policy for the development of consumer prices. Public deficits can lead to inflation if the money supply is expansive. The high level of national debt, not only in the Euro-crisis countries, and the strong increase in total assets of the European Central Bank, as a result of the unconventional monetary policy, caused fears on inflating national debt. The transmission from public debt to inflation through money supply and long-term interest rate will be shown in the paper. Based on these theoretical thoughts, the variables public debt, consumer price index, money supply m3 and long-term interest rate will be analysed within a vector error correction model estimated by Johansen approach. In the empirical part of the article, quarterly data for Germany from 1991 by 2010 are to be examined.

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    Paper provided by Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät in its series Statistische Diskussionsbeiträge with number 51.

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    Date of creation: Jan 2014
    Date of revision:
    Handle: RePEc:pot:statdp:51
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    1. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    2. Giannitsarou, Chryssi & Scott, Andrew, 2006. "Inflation Implications of Rising Government Debt," CEPR Discussion Papers 5961, C.E.P.R. Discussion Papers.
    3. Carmen M. Reinhart & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," BIS Working Papers 363, Bank for International Settlements.
    4. Olivier J. Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," IMF Staff Position Notes 2010/03, International Monetary Fund.
    5. Bleaney, Michael, 1996. "Inflation and Public Debt," Australian Economic Papers, Wiley Blackwell, vol. 35(66), pages 141-55, June.
    6. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    7. Hansen, Peter Reinhard & Johansen, Soren, 1998. "Workbook on Cointegration," OUP Catalogue, Oxford University Press, number 9780198776079.
    8. Paul De Grauwe, 2011. "The European Central Bank: Lender of Last Resort in the Government Bond Markets?," CESifo Working Paper Series 3569, CESifo Group Munich.
    9. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    10. Majid Taghavi, 2000. "Debt, growth and inflation in large European economies: a vector auto-regression analysis," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 159-173.
    11. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, March.
    12. Uwe Wagschal & Georg Wenzelburger & Thieß Petersen & Ole Wintermann, 2009. "Determinanten der Staatsverschuldung in den deutschen Bundesländern," Wirtschaftsdienst, Springer, vol. 89(3), pages 204-212, March.
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