Mild Inflation Naturally Prevents Divergence of Debt to GDP Ratio

Yasuhito Tanaka

Economic Analysis Letters, 2024, vol. 3, issue 4, 9-22

Abstract: This paper shows mainly the following results. 1) The debt to GDP ratio cannot diverge to infinity, that is, fiscal collapse is impossible. The necessary condition for this result is that the propensity to consume from the asset is positive. 2) The divergence of the debt to GDP ratio is prevented by inflation when the interest rate on government bonds is considerably higher than the real growth rate, and the inflation rate which is sufficient to prevent divergence of the debt to GDP ratio is smaller than the interest rate on government bonds. Only an inflation rate slightly greater than the difference between the interest rate on government bonds and the sum of the real growth rate and the propensity to consume from the asset is required. This inflation is not caused by policy but occurs naturally.

Keywords: Prevention of Debt to GDP Ratio Divergence; Mild Inflation; Budget Deficit (search for similar items in EconPapers)
Date: 2024
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