Inflation and Public Debt Reversals in the G7 Countries
IMF Working Papers, June 10, 2014
Source details
- Canonical URL
- Inflation and Public Debt Reversals in the G7 Countries
Other formats
Bibliographic details
- Authors: Bernardin Akitoby, Takuji Komatsuzaki, Ariel J Binder
- Published: June 10, 2014
- Series: IMF Working Papers
Summary findings
- The paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries.
- 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.
- 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.
- Raising inflation to 6 percent for the next five years would reduce the average net debt-to-GDP ratio by about 14 percentage points under the partial Fisher effect.
- Higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies, but it could hardly solve the debt problem on its own.
Simulation scenarios and quantitative results
- Zero-inflation scenario:
- Duration: five years
- Outcome: average net debt-to-GDP ratio increases by about 5 percentage points over the next five years
- High-inflation scenario:
- Inflation level: 6 percent
- Duration: five years
- Outcome under full Fisher effect: average net debt-to-GDP ratio reduced by about 11 percentage points
- Outcome under partial Fisher effect: average net debt-to-GDP ratio reduced by about 14 percentage points
Risks, challenges, and limitations highlighted
- Difficulty of generating higher inflation, as evidenced by Japan’s experience in the last few decades.
- Un-anchoring of inflation expectations could:
- increase long-term real interest rates
- distort resource allocation
- reduce economic growth
- hurt lower–income households
- Conclusion: higher inflation may provide modest debt relief but entails significant challenges and risks and is not a standalone solution to public debt problems.
Subject areas and keywords (as listed)
- 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