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Nominal debt and inflation stabilization
Author(s) -
Kitano Shigeto
Publication year - 2009
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2009.00116.x
Subject(s) - economics , monetary economics , debt , government debt , currency , inflation (cosmology) , shock (circulatory) , internal debt , fiscal policy , term (time) , nominal interest rate , debt to gdp ratio , macroeconomics , monetary policy , real interest rate , medicine , physics , quantum mechanics , theoretical physics
The “fiscal theory of currency crises” (Daniel 2001; Corsetti and Maćkowiak 2005, 2006) claims that with long‐term nominal debt, a government can delay the timing of an inevitable currency crisis that results from a fiscal shock. The present paper shows that, in contrast, long‐term nominal debt might have destabilizing effects when a government introduces an inflation stabilization policy. It is shown that a stabilization policy that is successful in the absence of long‐term nominal debt can cause a crisis when long‐term nominal debt exists. The model implies that a government with a large stock of long‐term nominal debt must overcome a high fiscal hurdle for a successful stabilization policy. This difficulty is avoidable if long‐term debt is indexed to inflation.