Working Paper: CEPR ID: DP18410
Authors: Luis Brandaomarques; Marco Casiraghi; Olamide Harrison; Gaston Gelos; Gunes Kamber
Abstract: This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government debt surprises on inflation expectations in advanced- and emerging market economies. It finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in economies with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in emerging market economies with high and dollarized debt levels, and weaker monetary policy frameworks.
Keywords: Inflation Expectations; Public Debt; Monetary Policy
JEL Codes: E31; E41; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt surprises (F34) | long-term inflation expectations (E31) |
| initial debt levels (F34) | long-term inflation expectations (E31) |
| high initial debt levels (F34) | debt surprises (F34) |
| debt dollarization (F34) | long-term inflation expectations (E31) |
| debt surprises (F34) | complications in monetary policy landscape (E61) |
| high debt levels (F34) | complications in monetary policy landscape (E61) |