Public Debt and Changing Inflation Targets
35 Pages Posted: 21 Jun 2016
Date Written: 2013
What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor.
Keywords: public debt, learning, inflation target, callable perpetuity, debt maturity
JEL Classification: E31, E52, H63
Suggested Citation: Suggested Citation