Inflating Away the Public Debt? An Empirical Assessment
51 Pages Posted: 23 Jul 2014 Last revised: 30 Nov 2020
Date Written: November 29, 2020
This paper proposes a new method to measure the impact of inflation on the real value of public debt. The distribution of debt debasement is based on two inputs: the distribution of privately-held nominal debt by maturity, for which we provide new estimates, and the distribution of risk-adjusted inflation dynamics, for which we provide a novel copula estimator using options data. We find that it is unlikely that inflation by itself can lower the U.S. fiscal burden significantly because debt is concentrated at short maturities and perceived inflation shocks have little short-run persistence and are small.
Keywords: inflation, debt debasement, value at risk, inflation derivatives, debt maturity structure, financial repression
JEL Classification: E31, E64, G18
Suggested Citation: Suggested Citation