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IMF Staff Papers Logo    September 2000
Volume 47, Number 3
Inflation and Sovereign Default
By Turalay Kenc, William Perraudin, and Paolo Vitale

Full Text of this Article (PDF 110K)

Abstract: Recent research has highlighted the role that the government budget constraint plays in determining the consumer price level. According to the fiscal approach to price determination, prices adjust so that the discounted value of future real government primary surpluses equals the current real value of public debt. An important implication is that the probability of a crisis involving default on public debt may directly affect consumer prices. This paper examines the interaction of prices and sovereign insolvency crises using simple, continuous-time models of the government budget constraint. [JEL E40, E63, F34, H63]

2001 International Monetary Fund