Working Paper: NBER ID: w3287
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 nonstationarity of the discounted public debt suggests that indefinite continuation of the pattern of behavior reflected in the historical discounted debt process is inconsistent with the maintenance of solvency. This message is reinforced by the recent behavior 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; inflation; monetization; India; fiscal policy
JEL Codes: E62; H63; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising public debt burden (H63) | insolvency of the national exchequer (H69) |
| rising debt-to-GNP ratio (H69) | risk of insolvency (G33) |
| monetization of persistent deficits (E62) | inflation (E31) |
| fiscal deficits (H68) | inflationary pressures (E31) |
| seigniorage (E42) | public debt (H63) |