Inflating Away the Public Debt? An Empirical Assessment
67 Pages Posted: 23 Jul 2014 Last revised: 22 Dec 2017
Date Written: December 1, 2017
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: Suggested Citation