Inflation Implications of Rising Government Debt

39 Pages Posted: 4 Jan 2007

See all articles by Chryssi Giannitsarou

Chryssi Giannitsarou

University of Cambridge - Faculty of Economics; Centre for Economic Policy Research (CEPR)

Andrew Scott

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

The intertemporal budget constraint of the government implies a relationship between a ratio of current liabilities to the primary deficit with future values of inflation, interest rates, GDP and narrow money growth and changes in the primary deficit. This relationship defines a natural measure of fiscal balance and can be used as an accounting identity to examine the channels through which governments achieve fiscal sustainability. We evaluate the ability of this framework to account for the fiscal behaviour of six industrialised nations since 1960. We show how fiscal imbalances are mainly removed through adjustments in the primary deficit (80-100%), with less substantial roles being played by inflation (0-10%) and GDP growth (0-20%). Focusing on the relation between fiscal imbalances and inflation suggests extremely modest interactions. This post WWII evidence suggests that the widely anticipated future increases in fiscal deficits, need not necessarily have a substantial impact on inflation.

Keywords: Fiscal deficit, fiscal sustainability, government debt, inflation, intertemporal budget constraint

JEL Classification: E31, E62

Suggested Citation

Giannitsarou, Chryssi and Scott, Andrew, Inflation Implications of Rising Government Debt (November 2006). CEPR Discussion Paper No. 5961. Available at SSRN: https://ssrn.com/abstract=954945

Chryssi Giannitsarou (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andrew Scott

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7706 6780 (Phone)
+44 20 7402 7875 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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