Inflating Away the Public Debt? An Empirical Assessment

July 2014
Jens Hilscher, Aon Raviv, Ricardo Reis

We propose and implement a method that provides quantitative estimates of theextent to which higher-than-expected inflation can lower the real value of outstand-ing government debt. Looking forward, we derive a formula for the debt burden thatrelies on detailed information about debt maturity and claimholders, and that usesoption prices to construct risk-adjusted probability distributions for inflation at di↵er-ent horizons. The estimates suggest that it is unlikely that inflation will lower the USfiscal burden significantly, and that the e↵ect of higher inflation is modest for plausiblecounterfactuals. If instead inflation is combined with financial repression that ex postextends the maturity of the debt, then the reduction in value can be significant