Is Inflation Effective for Liquidating Short-Term Nominal Debt?

Guillermo Calvo

IMF Staff Papers, 1989, vol. 36, issue 4, 950-960

Abstract: The possibility of reducing the real value of domestic nonindexed government debt through inflation is studied. A central result is that this kind of debt liquidation is possible even though prices are sticky and government bonds are short term. A policy implication is that short bond maturities are no safeguard against surprise devaluations intended to lower the burden of the debt. If devaluation incentives are present, nominal nonindexed bonds could give rise to situations in which devaluations are a consequence of self-fulfilling expectations cycles.

Date: 1989
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