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Debt Decomposition and the Role of Inflation: A Security Level Analysis for India

Piyali Das and Chetan Ghate ()

No 451, IEG Working Papers from Institute of Economic Growth

Abstract: In this paper, to study India’s debt dynamics, we assemble a novel data-set on Indian public debt with consistently defined aggregate annual components from 1951–2018, and Centre-State security level data from 2000–2018. Based on aggregate debt data, we quantify the contribution of inflation, real GDP growth, nominal interest rates and primary deficit/surplus towards India’s debt-dynamics. We find that inflation is an important component in financing India’s government debt historically. From the security level data, using the Hall-Sargent methodology, we find that nominal returns on the marketable and non-marketable portions of the Centre’s debt account for the highest contribution towards changes in public debt. Our paper helps inform the debate on the adoption of flexible inflation targeting in India.

Keywords: Debt Decomposition; Fiscal Dominance; Indian Economy; Flexible Inflation Targeting; Public Debt in EMDEs. (search for similar items in EconPapers)
JEL-codes: E52 E62 E65 G12 G28 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2022-02-01
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-mac and nep-mon
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Published as Institute of Economic Growth, Delhi, February 2022, pages 1-58

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