IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdps/062013.html
   My bibliography  Save this paper

Public debt and changing inflation targets

Author

Listed:
  • Krause, Michael U.
  • Moyen, Stéphane

Abstract

What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor.

Suggested Citation

  • Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:062013
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/71902/1/742499790.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    2. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2014. "Sovereign Debt Booms in Monetary Unions," American Economic Review, American Economic Association, vol. 104(5), pages 101-106, May.
    3. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    4. 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.
    5. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2010. "Disinflation Shocks in the Eurozone: A DSGE Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 289-323, March.
    6. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2011. "Inflation and the fiscal limit," European Economic Review, Elsevier, vol. 55(1), pages 31-47, January.
    7. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
    8. Frank Schorfheide, 2008. "DSGE model-based estimation of the New Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 397-433.
    9. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
    10. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
    11. Francesco Bianchi, 2013. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 463-490.
    12. Christopher Erceg & Jesper Lindé, 2014. "Is There A Fiscal Free Lunch In A Liquidity Trap?," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 73-107, February.
    13. Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 187-232.
    14. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 111-126, October.
    15. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    16. Klaus Schmidt-Hebbel & Carl E. Walsh, 2009. "Monetary Policy under Uncertainty and Learning: An Overview," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 1, pages 001-025 Central Bank of Chile.
    17. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    18. 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.
    19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    20. Darracq Pariès, Matthieu & Moyen, Stéphane, 2012. "Monetary policy and inflationary shocks under imperfect credibility," Economics Letters, Elsevier, vol. 116(3), pages 571-574.
    21. Andrew Levin & David López-Salido & Edward Nelson & Yack Yun, 2010. "Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 143-189, March.
    22. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    23. Henning Bohn, 2011. "The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(3), pages 282-302, September.
    24. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    25. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
    26. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
    27. Martin Melecký & Diego Rodríguez Palenzuela & Ulf Söderström, 2009. "Inflation Target Transparency and the Macroeconomy," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 10, pages 371-411 Central Bank of Chile.
    28. Hilscher, Jens & Raviv, Alon & Reis, Ricardo, 2014. "Inflating Away the Public Debt? An Empirical Assessment," CEPR Discussion Papers 10078, C.E.P.R. Discussion Papers.
    29. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    30. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
    31. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
    32. Michael Woodford, 2011. "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1-35, January.
    33. Leith, Campbell & Wren-Lewis, Simon, 2011. "Discretionary policy in a monetary union with sovereign debt," European Economic Review, Elsevier, vol. 55(1), pages 93-117, January.
    34. Chryssi Giannitsarou & Andrew Scott, 2008. "Inflation Implications of Rising Government Debt," NBER Chapters,in: NBER International Seminar on Macroeconomics 2006, pages 393-442 National Bureau of Economic Research, Inc.
    35. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    36. Eric M. Leeper & Xuan Zhou, 2013. "Inflation's Role in Optimal Monetary-Fiscal Policy," NBER Working Papers 19686, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Reinhard Neck & Dmitri Blueschke, 2016. "United we stand: on the macroeconomics of a Fiscal union," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 333-347, May.
    2. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2016. "Nominal rigidities in debt and product markets," LSE Research Online Documents on Economics 86223, London School of Economics and Political Science, LSE Library.
    3. repec:eee:joecas:v:14:y:2016:i:pa:p:128-146 is not listed on IDEAS
    4. Mayer, Eric & Rüth, Sebastian & Scharler, Johann, 2013. "Government debt, inflation dynamics and the transmission of fiscal policy shocks," Economic Modelling, Elsevier, vol. 33(C), pages 762-771.
    5. Reinhard Neck & Dmitri Blueschke, 2014. "“Haircuts” for the EMU periphery: virtue or vice?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(2), pages 153-175, May.
    6. Bernardin Akitoby & Takuji Komatsuzaki & Ariel J Binder, 2014. "Inflation and Public Debt Reversals in the G7 Countries," IMF Working Papers 14/96, International Monetary Fund.
    7. Scheer, Alexander, 2015. "Debt consolidation with long-term debt," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112874, Verein für Socialpolitik / German Economic Association.
    8. Michael Reiter & Philipp Hergovich, 2016. "Housing and the Redistributive Effects of Monetary Policy," 2016 Meeting Papers 1324, Society for Economic Dynamics.

    More about this item

    Keywords

    public debt; learning; inflation target; callable perpetuity; debt maturity;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdps:062013. 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: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/dbbgvde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.