Inflating Away the Public Debt? An Empirical Assessment

46 Pages Posted: 23 Jul 2014  

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: July 21, 2014

Abstract

We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.

Keywords: inflation options, maturity of government debt, copulas, required reserves

JEL Classification: E31, E64, G18

Suggested Citation

Hilscher, Jens and Raviv, Alon and Reis, Ricardo, Inflating Away the Public Debt? An Empirical Assessment (July 21, 2014). 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 A.M.R. 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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