Keywords
Inflation; debt crisis; G7; public debt; sovereign debt
Abstract
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 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, an un- anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.
Recommended Citation
Akitoby, B., Binder, A., & Komatsuzaki, T. (2024). Inflation and Public Debt Reversals in the G7 Countries. Journal of Banking and Financial Economics, 2017(7), 28-50. https://doi.org/10.7172/2353-6845.jbfe.2017.1.2
First Page
28
Last Page
50
Page Count
23
Received Date
20 January 2016
Revised Date
28 July 2016
Accept Date
09 January 2017
Online Available Date
27 January 2017
DOI
10.7172/2353-6845.jbfe.2017.1.2
JEL Code
E31; F34; H63
Publisher
University of Warsaw