Inflation and Public Debt Reversals in the G7 Countries

• Authors: Akitoby Bernardin , Binder Ariel , Komatsuzaki Takuji
• Languages of publication: EN

Abstracts

EN

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 during that period. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debtto-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, an unanchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Keywords

EN

Inflation; debt crisis; G7; public debt; sovereign debt

• Publisher: Uniwersytet Warszawski. Wydział Nauk Ekonomicznych
• Journal: Journal of Banking and Financial Economics
• Year: 2017
• Issue: 1(7)
• Pages: 28-50

Dates

online

2017-05-19

Contributors

author

Akitoby Bernardin

• International Monetary Fund, United States of America

author

Binder Ariel

• University of Michigan, United States of America

author

Komatsuzaki Takuji

• International Monetary Fund, United States of America

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Identifiers

ISSN

2353-6845

DOI

10.7172/2353-6845.jbfe.2017.1.2