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

Andreas Nastansky, Alexander Mehnert and Hans Gerhard Strohe

No 51, Statistische Diskussionsbeiträge from Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät

Abstract: 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.

Keywords: Beveridge-Nelson Decomposition; Public Debt; Inflation; Money Supply; Vector Error Correction Model (search for similar items in EconPapers)
JEL-codes: C32 E31 E51 H63 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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