Using inflation to erode the US public debt

Joshua Aizenman, Nancy Marion

Research output: Contribution to journalArticlepeer-review

46 Scopus citations

Abstract

Projections indicate the US Federal debt held by the public may exceed 70-100% of GDP within 10. years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6%. Inflation reduced this ratio by more than a third within a decade. Yet there are some important differences - shorter debt maturities today reduce the temptation to inflate, while the larger share of debt held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the US debt overhang may induce an increase in inflation of about 5% for several years that could significantly reduce the debt ratio.

Original languageEnglish
Pages (from-to)524-541
Number of pages18
JournalJournal of Macroeconomics
Volume33
Issue number4
DOIs
StatePublished - 1 Dec 2011
Externally publishedYes

Keywords

  • Debt maturity
  • Debt overhang
  • Inflation
  • Public debt

ASJC Scopus subject areas

  • Economics and Econometrics

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