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Inflating Away the Public Debt? An Empirical Assessment

67 Pages Posted: 23 Jul 2014 Last revised: 22 Dec 2017

Jens Hilscher

University of California, Davis

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Ricardo Reis

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2017

Abstract

This paper proposes and implements a new method to measure the impact of future inflation on the real value of outstanding public debt. It produces a distribution of debt debasement that relies on a forward-looking approach and is based on two inputs: (1) the distribution of privately-held nominal debt by maturity, for which we provide new estimates for the United States, (2) the distribution of risk-adjusted inflation dynamics over time, for which we provide a novel econometric copula estimator using data from options contracts. We find that it is unlikely that inflation will lower the U.S. fiscal burden significantly. This is because of the interaction of debt concentrated at short maturities, and perceived inflation shocks that are small and have little short-run persistence. If instead inflation is combined with financial repression, both together can result in substantial debt debasement.

Keywords: inflation, debt debasement, value at risk, inflation derivatives, debt maturity

JEL Classification: E31, E64, G18

Suggested Citation

Hilscher, Jens and Raviv, Alon and Reis, Ricardo, Inflating Away the Public Debt? An Empirical Assessment (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=2469994 or http://dx.doi.org/10.2139/ssrn.2469994

Jens Hilscher (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

Ricardo Reis

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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