<p>IIM Indore seeks to be a contextually-relevant business school with world-class academic standards that develops socially-conscious managers, leaders and entrepreneurs. IIM Indore is committed to: Excellence in management education, research, and training, Use of contemporary participant-centric pedagogies and teaching methods, A presence in emerging segments of management education.</p>

IIM Indore

Post-Great Recession many advanced nations have experienced an unprecedented rise in debt-to-GDP ratios. Among other factors, increasing age-related spending can add to fiscal stress with a high peacetime debt-GDP ratio. Therefore, it is crucial to understand the factors that can affect the debt dynamics. Previous literature highlights the components affecting the debt-GDP ratio as nominal interest rate, inflation, growth rate and primary deficit/surplus. However, the contribution of these financing components was calculated without any reference to policy regimes. This paper calculates the financing components and their distribution under two regimes: “active” fiscal and “passive” monetary policy (“F”) and “active” monetary and “passive” fiscal policy (“M”) using US data between 1942 and 2017. The results show that inflation, growth rate and primary deficit have played essential roles in affecting the debt-GDP dynamics under regime F.

Economics

Economic Modelling

Fiscal financing components in a simple model of policy interaction

We assemble a novel data-set on Indian public debt that contains consistently defined aggregate annual components from 1951-2018 and Centre-State security level data from 2000-2018. Using a standard debt-decomposition framework, we quantify the extent to which inflation , real GDP growth, nominal interest rates and the primary deficit/surplus explain Indian debt-dynamics. We show that inflation's contribution to lowering public debt has been substantial over time. We also undertake a Hall and Sargent (1997, 2011) style debt-decomposition using all outstanding Centre and State securities from 2000-2018. We show that nominal returns on the marketable and non-marketable portions of the Centre's debt account for the highest contribution in explaining the change in public debt. We show that while the adoption of flexible inflation targeting has diminished the role of inflation in debt liquidation, the large contribution of nominal returns pose a challenge to debt management.