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Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations
Author:
Mr. Luis Brandao Marques https://isni.org/isni/0000000404811396 International Monetary Fund

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,
Marco Casiraghi
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,
Mr. R. G Gelos
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https://orcid.org/0000-0003-4362-676X
,
Olamide Harrison https://isni.org/isni/0000000404811396 International Monetary Fund

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, and
Gunes Kamber
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 143
Language:
English
Publication Date:
30 Jun 2023
DOI:
https://doi.org/10.5089/9798400243059.001
ISBN:
9798400243059
ISSN:
1018-5941
Pages:
33
Keywords:
Inflation expectations; monetary policy; fiscal dominance; debt; inflation expectation; debt surprise; government debt shock; share classification; debt dollarization; Inflation; Emerging and frontier financial markets; Foreign currency debt; Fiscal stance; Global; Western Hemisphere
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government debt surprises on inflation expectations in advanced- and emerging market economies. It finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in economies with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in emerging market economies with high and dollarized debt levels, and weaker monetary policy frameworks.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund