Inflation Dynamics: The Role of Public Debt and Policy Regimes

67 Pages Posted: 2 Jun 2012 Last revised: 16 Jul 2015

See all articles by Saroj Bhattarai

Saroj Bhattarai

Pennsylvania State University - Department of Economics

Jae Won Lee

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences - New Brunswick/Piscataway - Department of Economics

Woong Yong Park

Seoul National University

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Date Written: April 29, 2014

Abstract

In a passive monetary and active fiscal policy regime, changes in the value of public debt generate wealth effects on households. Then, in contrast to the active monetary and passive fiscal policy regime, inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks. Moreover, a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks. In a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters affect inflation.

Keywords: Inflation target, Inflation response, Public debt, Monetary and fiscal policy regimes, Monetary and fiscal policy stances

JEL Classification: E31, E52, E63

Suggested Citation

Bhattarai, Saroj and Lee, Jae Won and Park, Woong Yong, Inflation Dynamics: The Role of Public Debt and Policy Regimes (April 29, 2014). Available at SSRN: https://ssrn.com/abstract=2071339 or http://dx.doi.org/10.2139/ssrn.2071339

Saroj Bhattarai

Pennsylvania State University - Department of Economics ( email )

Harrisburg, PA
United States

Jae Won Lee (Contact Author)

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences - New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Woong Yong Park

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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