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Public Debt and Inflation: the Role of Inflation‐Sensitive Instruments

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  • Alexandros Mandilaras
  • Paul Levine

Abstract

This paper examines the effect of inflation on the choice of government debt structure. We develop work by Missale and Blanchard (American Economic Review, Vol. 84 (1994), No. 1, pp. 309–319) to allow for the joint determination of inflation and the share of inflation‐sensitive securities. We assume that governments prefer domestic nominal long‐term debt. We show that the subgame perfect equilibrium involves a negative relation between inflationary expectations and the share of such debt. Panel data estimation for 15 OECD countries provides strong support for the theory.

Suggested Citation

  • Alexandros Mandilaras & Paul Levine, 2001. "Public Debt and Inflation: the Role of Inflation‐Sensitive Instruments," Manchester School, University of Manchester, vol. 69(s1), pages 1-21.
    • Handle: RePEc:bla:manchs:v:69:y:2001:i:s1:p:1-21
    DOI: 10.1111/1467-9957.69.s1.1
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    Cited by:

    1. Naeem Akram* & Syed Imran RAIS & Ihtsham Ul Haq PADDA**, 2011. "Synthesis of the Fiscal and Monetary Policies in Price Level Determination: Evidence from Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 21, pages 37-52.
    2. Van Bon Nguyen, 2022. "Does governance matter for the public debt–inflation relationship in developed countries? Panel quantile regression approach," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 93(4), pages 1153-1173, December.
    3. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    4. Ali al-Nowaihi & Paul Levine & Alex Mandilaras, 2006. "Central Bank Independence and the `Free Lunch Puzzle': A New Perspective," School of Economics Discussion Papers 0806, School of Economics, University of Surrey.
    5. Thouraya Bahri & Aditya Singh, 2021. "COVID-19 and the Impact on Debt: Policy Implications," Working Papers 2107, New School for Social Research, Department of Economics.

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