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Public Debt and Inflation: A Review of International Literature

Author

Listed:
  • Aimola Akingbade U.

    (University of South Africa, Department of Economics, P.O Box 392, UNISA, 0003, Pretoria, South Africa)

  • Odhiambo Nicholas M.

    (University of South Africa, Department of Economics, P.O Box 392, UNISA, 0003, Pretoria, South Africa)

Abstract

Research background: Public debt arises mainly from debt-financed deficits. More and more countries are resorting to additional public indebtedness to raise additional financial resources to meet government funding needs, which are unattainable by the usual tax means. As a result, increasingly, government spending is rising faster than revenue is received, and the excess is financed mainly through domestic and external borrowings. Expensive borrowings by a government (in an environment of increasing interest rates) may be harmful to inflation and the macroeconomic stabilisation process. This trend is raising concerns among policymakers as it undermines macroeconomic stability, especially in developing economies with relatively weak and dependent monetary authorities in the formulation and implementation of monetary policies. Hence, the association between public debt and inflation is of importance in the inflationary process of an economy.Purpose: In this paper, theoretical and empirical literature on the link between public debt and inflation has been surveyed in detail. The focus of the paper was centred on the review of literature on the link between total public debt, external public debt, domestic public debt and inflation.Research methodology: This paper presents an extensive review of scholarly studies on the link between public debt and inflation based on their results. The paper analysed, synthesised, and critically evaluated previous studies on the relationship between public debt and inflation on both the theoretical and empirical fronts.Results: The literature reviewed revealed the association between public debt and inflation. The surveyed literature shows that the relationship between public debt and inflation varies from country to country, with either a positive or negative relationship. However, in the majority of the literature, the link between public debt and inflation tilts towards a positive relationship. This finding is more prominent in indebted countries with higher levels of public debt and a less-developed financial market. Although there is no consensus on the positive or negative relationship between public debt and inflation, the study found that a positive relationship between public debt and inflation tends to predominate among the studies reviewed.Novelty: The study provides an insight into the relationship between public debt and inflation based on a detailed review of literature on the subject in both developed and developing economies.

Suggested Citation

  • Aimola Akingbade U. & Odhiambo Nicholas M., 2020. "Public Debt and Inflation: A Review of International Literature," Folia Oeconomica Stetinensia, Sciendo, vol. 20(1), pages 9-24, June.
    • Handle: RePEc:vrs:foeste:v:20:y:2020:i:1:p:9-24:n:1
    DOI: 10.2478/foli-2020-0001
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    References listed on IDEAS

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    Cited by:

    1. Akingbade U. Aimola & Nicholas M. Odhiambo, "undated". "Public Debt and Inflation: Empirical Evidence from Ghana," Working Papers AESRIWP06, African Economic and Social Research Institute (AESRI).
    2. Akingbade U. Aimola & Nicholas M. Odhiambo & Christian Nsiah, 2021. "Public debt and inflation nexus in Nigeria: An ARDL bounds test approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1921905-192, January.
    3. Jocelyne Zoumenou, 2023. "On the impact of fiscal policy on inflation: The case of fiscal rules," EconomiX Working Papers 2023-21, University of Paris Nanterre, EconomiX.
    4. Biškupec Petra Popek & Ružić Ivan, 2023. "Confronting the Inflationary Pressures of Introducing the Euro with the Effects of Negative External Shocks," Folia Oeconomica Stetinensia, Sciendo, vol. 23(1), pages 194-207, June.
    5. Akingbade U. Aimola & Nicholas M. Odhiambo & Christian Nsiah, 2021. "Public debt and inflation nexus in Nigeria: An ARDL bounds test approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1921905-192, January.
    6. Aimola, Akingbade U & Odhiambo, Nicholas M, 2021. "Public debt and inflation: Empirical evidence from Ghana," Working Papers 27063, University of South Africa, Department of Economics.

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    More about this item

    Keywords

    public debt; inflation; fiscal and monetary policy; relationship;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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