Appendix I Debt Maturity and Inflation

Manmohan Kumar, and Pablo Guidotti
Published Date:
March 1991
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It was noted in Section IV that changes in the maturity structure of nominal government debt may affect the intertemporal path of inflation. The effect of different maturities on inflation was illustrated by means of a numerical exercise presented in Table 8. The numbers presented in Table 8 correspond to the yearly rates of inflation which solve the following equation:

where b, s, π, and r denote the ratio of public debt to GDP, the primary surplus, the yearly rate of inflation, and the yearly discount rate, respectively; n is the number of years over which the fiscal surplus is sustained; and m is the maturity of the public debt. Thus, the left-hand side of equation (3) is the present value of a primary fiscal surplus, s, sustained over π years, while the right-hand side of the equation is the present value of the reduction in the real stock of debt, b, generated by a-constant rate of inflation, π, over m years. In Table 8, b takes values of 25 and 100; s equals 1 percent of GDP; r equals 0.05; n takes values of 5 and 10; and m takes values of 1, 3, 10, and 30.

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