Inflation and Public Debt Reversals in the G7 Countries

By Bernardin Akitoby, Takuji Komatsuzaki, Ariel J Binder

June 10, 2014

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Bernardin Akitoby, Takuji Komatsuzaki, and Ariel J Binder. Inflation and Public Debt Reversals in the G7 Countries, (USA: International Monetary Fund, 2014) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset and liability management, Currencies, Debt reduction, Financial services, Inflation, Money, Prices, Public debt, Real interest rates

Keywords: Currencies, Debt drisis, Debt reduction, Debt reduction, G7, GDP deflator inflation, Global, Inflation, Inflation expectation, Inflation shock, Inflation-indexed debt, Interest rate, Public debt, Real interest rates, Short-term debt, Soverign debt, WEO inflation figure, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/096
Stock No:

WPIEA2014096
ISBN:

9781498369954
ISSN:

1018-5941

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