Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations
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Summary:
This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government debt surprises on inflation expectations in advanced- and emerging market economies. It finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in economies with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in emerging market economies with high and dollarized debt levels, and weaker monetary policy frameworks.
Series:
Working Paper No. 2023/143
Subject:
Emerging and frontier financial markets External debt Financial markets Fiscal policy Fiscal stance Foreign currency debt Inflation Prices Public debt
Frequency:
regular
English
Publication Date:
June 30, 2023
ISBN/ISSN:
9798400243059/1018-5941
Stock No:
WPIEA2023143
Format:
Paper
Pages:
33
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