Uniwersyteckie Czasopisma NaukoweSovereign debt and inflation – did we tame the ghost? Debt in times of crisis and its cointegration with inflation
Słowa kluczowe:
great depression, great recession, debt–inflation nexus, inflation targeting, vector error correction modelAbstrakt
With sovereign debt levels at record highs in western democracies – a problem exacerbated by the pandemic – the world faces the question of induced rising inflation on the horizon. This article presents a comprehensive review of literature about the most severe world economic crisis in the 20th and 21st centuries – the great depression and the great recession – as well as the debt levels preceding and following them. Furthermore, it investigates root causes of inflation and its connection with sovereign debt in developed economies. Finally, applying a vector error correction model, it shows the existence of a cointegrating relationship between debt and inflation in the US (and a positive sign of the former on the latter), confirming a moderate macroeconomic correlation between the two. Hence, despite the long period of high debt and low inflation fueling a recent-experience bias, the answer to question posed in the title is negative. The conclusion is that without substantial debt reduction over time, the (Western) world economies will again see a rising inflation regime. Informed and independent central banks are therefore ever-more important.
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