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  4. October 2016
  5. Public Debt and Changing Inflation Targets

Public Debt and Changing Inflation Targets

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Abstract

What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor.

Citation

Krause, Michael U., and Stéphane Moyen. 2016. "Public Debt and Changing Inflation Targets." American Economic Journal: Macroeconomics, 8 (4): 142-76. DOI: 10.1257/mac.20130014

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • H63 National Debt; Debt Management; Sovereign Debt
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