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Public Debt and Changing Inflation Targets

35 Pages Posted: 21 Jun 2016  

Michael U. Krause

University of Cologne

Stéphane Moyen

affiliation not provided to SSRN

Date Written: 2013

Abstract

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

Krause, Michael U. and Moyen, Stéphane, Public Debt and Changing Inflation Targets (2013). Bundesbank Discussion Paper No. 06/2013. Available at SSRN: https://ssrn.com/abstract=2796898

Michael U. Krause (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Stéphane Moyen

affiliation not provided to SSRN

No Address Available

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