Working Paper: CEPR ID: DP408
Authors: Willem H. Buiter; Urjit R. Patel
Abstract: The paper studies the solvency of the Indian public sector and the eventual monetization and inflation implied by stabilization of the debt/GNP ratio without any changes in the primary deficit. The non-stationarity of the discounted public debt suggests that solvency cannot be maintained with an indefinite continuation of the pattern of behaviour reflected in the historical discounted debt process. This message is reinforced by the recent behaviour of the debt/GNP ratio and the ratio of primary surplus plus seigniorage to GNP. Our estimates of the base money demand function suggest that even maximal use of seigniorage will not be sufficient to restore solvency.
Keywords: public debt; seigniorage; solvency
JEL Codes: 121; 134; 310; 321
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising public debt (H69) | insolvency (G33) |
| rising public deficits (H62) | insolvency (G33) |
| reliance on seigniorage (E42) | inflation (E31) |
| persistent deficits (H62) | monetization of debt (H63) |
| monetization of debt (H63) | inflation (E31) |
| fiscal policy choices (E62) | economic outcomes (F61) |