Faraglia, E., Marcet, A., Oikonomou, R. and Scott, A.

The impact of debt levels and debt maturity on inflation

The Economic Journal

Vol. 123(566) pp. F164-F192 (2013)

Abstract: We examine the implications for optimal inflation of changes in the level and maturity of government debt under the assumption where fiscal and monetary policies co-ordinate, and in the case of an independent central bank following a Taylor rule. Under co-ordination, inflation persistence and volatility depend on the sign, size and maturity of debt. Higher debt leads to higher inflation and longer maturity leads to more persistent inflation although inflation plays a minor role in achieving fiscal sustainability. Under an independent monetary authority, inflation is higher, more volatile and more persistent and plays a significant role in achieving fiscal solvency.

Author links: Elisa Faraglia  

Publisher's Link: http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12015/abstract