Inside Debt and the Stability of Inflation

Thomas Palley

Eastern Economic Journal, 2011, vol. 37, issue 4, 488-507

Abstract: This paper uses Tobin's [1975] model of deflation to analyze inflation. Stability of the inflation process depends on the strength of the Tobin–Mundell effect. The paper introduces the concept of expenditure acceleration effects, which are the Keynesian analog of increased velocity of money. It also includes inside debt, which increases the likelihood of inflation being unstable. The paper further expands Tobin's model and incorporates borrowing, debt repayment, and endogenous money. Flow borrowing effects on spending are destabilizing, as is endogenous money. Debt stock adjustment effects are stabilizing. Lastly, the paper discusses the monetary policy implications of high levels of inside debt.

Date: 2011
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