DP17559 Up and Away? Inflation and Debt Consolidation in Historical Perspective
The Global Financial Crisis and the COVID-19 pandemic bequeathed large increases in global public debt. At some point governments may seek to bring down these elevated debt-to-GDP ratios, including by inflating (by raising nominal GDP). We assemble a panel of debt consolidation episodes spanning 220 years and 183 nations. The evidence confirms that moderate inflation has been instrumental in facilitating large consolidations in the past. In fact, the frequency of successful debt consolidations was lower in periods of relatively high inflation. On the contrary, the largest concentration of debt consolidations coincided with periods of relatively low and stable inflation in the context of credible monetary policies and sound fiscal policies.