Abstract
Can higher inflation diminish the government debt and contribute to financing the budget deficit? And how do these public finance concerns influence inflationary expectations? These have been classic questions in macroeconomics since the seminal papers by Auemheimer (1974), Calvo (1978) and Barro (1983). The same questions recently became very relevant for several European countries in the aftermath of the 1992–3 Exchange Rate Mechanism crisis. In Sweden, our own country, the government deficit in 1994 stood at about 13 per cent of GDP.2 Increasing long bond rates and a depreciating kronor — as well as higher volatility in financial markets — were often explained by a fear that ‘politicians would lose control of government finances and resort to higher inflation as a solution.’ Developments in other countries with high debts and deficits, such as Italy or Spain, were similar.
The paper is an extended and revised version of a paper written in Swedish for a festschrift for Assar Lindbeck (persson, Persson and Svensson, 1995). We are grateful to our discussant John Campbell and to participants in the conference and in seminars at Bocconi University and Harvard for helpful comments.
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© 1998 International Economic Association
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Persson, M., Persson, T., Svensson, L.E.O. (1998). Debt, Cash Flow and Inflation Incentives: A Swedish Example. In: Calvo, G., King, M. (eds) The Debt Burden and its Consequences for Monetary Policy. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-26077-5_2
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