Debt Erosion and the Market Process
Economic Affairs 34(3) 2014: 370-378
12 Pages Posted: 26 Jul 2013 Last revised: 1 Mar 2015
Date Written: July 25, 2013
This paper explores the effects of debt erosion on the market process. Debt erosion is the attempt by government to lower the real value of its debt through the creation of unexpected inflation. In addition to the costs recognized by most economists, debt erosion through unexpected inflation can impair the price system’s ability to coordinate exchange activity and can result in costly capital misallocations. This is because the creation of unexpected inflation implies disequilibrium in the money market. To avoid the harm from such monetary shocks, this paper suggests a separation between money and state, enshrined in an explicit rule at the constitutional level.
Keywords: debt erosion, constitutional political economy, free banking, monetary constitution, monetary equilibrium theory, market process economics
JEL Classification: B53, E42, E52, E58, P16
Suggested Citation: Suggested Citation