DP408 Debt, Deficits and Inflation: An Application to the Public Finance of India

Author(s): Willem H. Buiter, U Patel
Publication Date: April 1990
Keyword(s): Public Debt, Seigniorage, Solvency
JEL(s): 121, 134, 310, 321
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=408

The paper studies the solvency of the Indian public sector and the eventual monetization and inflation implied by stabilization of the debt/GNP ratio without any changes in the primary deficit. The non-stationarity of the discounted public debt suggests that solvency cannot be maintained with an indefinite continuation of the pattern of behaviour reflected in the historical discounted debt process. This message is reinforced by the recent behaviour of the debt/GNP ratio and the ratio of primary surplus plus seigniorage to GNP. Our estimates of the base money demand function suggest that even maximal use of seigniorage will not be sufficient to restore solvency.