Inflation and Public Debt Reversals in the G7 Countries

29 Pages Posted: 28 Jul 2014

See all articles by Bernardin Akitoby

Bernardin Akitoby

International Monetary Fund (IMF) - Fiscal Affairs Department

Takuji Komatsuzaki

International Monetary Fund (IMF)

Ariel Binder

U.S. Census Bureau

Date Written: June 2014

Abstract

This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points over the next five years. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debt-to-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, un-anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Keywords: Inflation, Public debt, Developed countries, Group of seven, Econometric models, debt drisis, G7, soverign debt, average inflation, nominal interest rates, real interest rates, increase in inflation, monetary policy, monetary fund, real value, high inflation, percent inflation, gdp deflator, real money, effect of inflation, inflation rate, money stock, money balances, low inflation, price level, monetary policies, monetary economics, foreign currency, inflation tax, average inflation rate, value of money, lower inflation, central bank, real output, nominal interest rate, money balance, monetary union, monetary authorities, inflation rates

JEL Classification: E31, F34, H63

Suggested Citation

Akitoby, Bernardin and Komatsuzaki, Takuji and Binder, Ariel, Inflation and Public Debt Reversals in the G7 Countries (June 2014). Available at SSRN: https://ssrn.com/abstract=2472859 or http://dx.doi.org/10.2139/ssrn.2472859

Bernardin Akitoby (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Takuji Komatsuzaki

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ariel Binder

U.S. Census Bureau ( email )

4600 Silver Hill Road
Washington, DC 20233
United States

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