Inflation Vs traditional deflator instruments: a comparison between debt management strategies in EU, USA and China

Abstract

Abstract The unprecedent increase in public debt is affecting economies around the world. At the same time, Central bankers are raising interest rates due to inflation concerns. While investigating the effects of inflation on public debt for EU, USA and China, we compare how a boost in such rate with respect to traditional instruments might reduce debt-to-GDP. Eventually, we conduct a debt decomposition analysis. Three main results are presented. First, it emerges that an increase in inflation acts as a deflator only for developed economies. Second, raising taxes entails an increase in public debt for both emerging and advanced economies. Instead, public expenditure is preferred as a deflator instrument, especially in times of crisis. Third, divergent political stances create a significant heterogeneity among and within regions. The results suggest that stimulative policies based on traditional fiscal instruments are essential for debt sustainability and economic growth, especially during times of distress. JEL Classification System: C23, E31, E44, F43