Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations

By Luis Brandão-Marques, Marco Casiraghi, Gaston Gelos, Olamide Harrison, Gunes Kamber

June 30, 2023

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Luis Brandão-Marques, Marco Casiraghi, Gaston Gelos, Olamide Harrison, and Gunes Kamber. Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations, (USA: International Monetary Fund, 2023) accessed December 21, 2024

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.

Summary

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.

Subject: Emerging and frontier financial markets, External debt, Financial markets, Fiscal policy, Fiscal stance, Foreign currency debt, Inflation, Prices, Public debt

Keywords: Debt, Debt dollarization, Debt surprise, Emerging and frontier financial markets, Fiscal dominance, Fiscal stance, Foreign currency debt, Global, Government debt shock, Inflation, Inflation expectation, Inflation expectations, Monetary policy, Share classification, Western Hemisphere

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/143
Stock No:

WPIEA2023143
ISBN:

9798400243059
ISSN:

1018-5941

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