Inflation and Public Debt Reversals in the G7 Countries

Journal Title: Journal of Banking and Financial Economics - Year 2017, Vol 1, Issue 7

Abstract

This paper investigates the impact of low or high infl ation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if infl ation were to fall to zero for fi ve years, the average net debt-to-GDP ratio would increase by about 5 percentage points during that period. In contrast, raising infl ation to 6 percent for the next fi ve years would reduce the average net debtto- GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher infl ation 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 signifi cant challenges and risks. First of all, it may be diffi cult to create higher infl ation, as evidenced by Japan’s experience in the last few decades. In addition, an unanchoring of infl ation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Authors and Affiliations

Bernardin Akitoby, Ariel Binder, Takuji Komatsuzaki

Keywords

Related Articles

Macroprudential Policy Effectiveness: Lessons from Southeastern Europe

This paper presents a detailed account of the rich set of macroprudential measures (MPPs) implemented in Bulgaria, Croatia, Romania, and Serbia during their synchronized boom and bust cycles in 2002–12, and assesses thei...

Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

Asset allocation decisions of international investors are at the core of capital fl ows. This paper explores the impact of these decisions on long-term government bond yields, using a quarterly investor base dataset for...

Risks and Opportunities of Participation in Global Value Chains

Risk is inherent to the pursuit of opportunity. This paper draws on the recent literature and looks at the risks and opportunities firms and their workers face in the global value chains. First, it examines the sharing m...

EU banks after the crisis: sinners in the hands of angry markets

European Union banks were severely hit by the global financial crisis in 2008 and their stock prices and returns have generally not recovered since then, differently to what has been observed in other sectors (i.e., non-...

Financial Deepening, Property Rights, and Poverty: Evidence from Sub-Saharan Africa

Recent studies on the relationship between financial development and poverty have been inconclusive. Some claim that, by allowing more entrepreneurs to obtain financing, financial development improves the allocation of c...

Download PDF file
  • EP ID EP298362
  • DOI 10.7172/2353-6845.jbfe.2017.1.2
  • Views 116
  • Downloads 0

How To Cite

Bernardin Akitoby, Ariel Binder, Takuji Komatsuzaki (2017). Inflation and Public Debt Reversals in the G7 Countries. Journal of Banking and Financial Economics, 1(7), 28-50. https://europub.co.uk/articles/-A-298362