Inflation and Public Debt Reversals in the G7 Countries

Bernardin Akitoby (), Ariel Binder and Takuji Komatsuzaki ()
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Bernardin Akitoby: International Monetary Fund, U.S.A.
Takuji Komatsuzaki: International Monetary Fund, United States of America

Journal of Banking and Financial Economics, 2017, vol. 1, issue 7, 5-27

Abstract: This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points during that period. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debtto-GDP ratio by about 11 percentage points under the full Fisher effect and about 14- percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, an unanchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Keywords: Inflation; debt crisis; G7; public debt; sovereign debt. (search for similar items in EconPapers)
JEL-codes: E31 F34 H63 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Inflation and Public Debt Reversals in the G7 Countries (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:sgm:jbfeuw:v:1:y:2017:i:7:p:28-50

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