The Impact of Debt Levels and Debt Maturity on Inflation

29 Pages Posted: 27 Feb 2013

See all articles by Elisa Faraglia

Elisa Faraglia

London Business School

Albert Marcet

Universitat Autònoma de Barcelona - Institut d'Anàlisi Economica CSIC

Rigas Oikonomou

Catholic University of Louvain (UCL)

Andrew Scott

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: February 2013

Abstract

We examine the implications for optimal inflation of changes in the level and maturity of government debt under the assumption where fiscal and monetary policies co‐ordinate, and in the case of an independent central bank following a Taylor rule. Under co‐ordination, inflation persistence and volatility depend on the sign, size and maturity of debt. Higher debt leads to higher inflation and longer maturity leads to more persistent inflation although inflation plays a minor role in achieving fiscal sustainability. Under an independent monetary authority, inflation is higher, more volatile and more persistent and plays a significant role in achieving fiscal solvency.

Suggested Citation

Faraglia, Elisa and Marcet, Albert and Oikonomou, Rigas and Scott, Andrew, The Impact of Debt Levels and Debt Maturity on Inflation (February 2013). The Economic Journal, Vol. 123, Issue 566, pp. F164-F192, 2013. Available at SSRN: https://ssrn.com/abstract=2225649 or http://dx.doi.org/10.1111/ecoj.12015

Elisa Faraglia

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Albert Marcet

Universitat Autònoma de Barcelona - Institut d'Anàlisi Economica CSIC ( email )

Edifici B
Bellaterra, 08193
Spain

Rigas Oikonomou

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Andrew Scott

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7706 6780 (Phone)
+44 20 7402 7875 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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