Working Paper: NBER ID: w20339
Authors: Jens Hilscher; Alon Raviv; Ricardo Reis
Abstract: We propose and implement a method that provides quantitative estimates of the extent to which higher- than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.
Keywords: public debt; inflation; financial repression
JEL Codes: E31; E64; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher than-expected inflation (E31) | lower real value of outstanding government debt (H63) |
| inflation (E31) | significant enhancement in reduction of debt value (G32) |
| anticipated outcomes of inflation (E31) | low probability of significant reduction in U.S. debt (H63) |
| maturity structure of privately held U.S. government debt (H63) | lower exposure to inflation (E31) |
| low maturity of privately held government debt + low probability of significant inflation (F34) | modest effect of inflation on fiscal burden (E62) |