What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor.
Krause, Michael U., and Stéphane Moyen.
"Public Debt and Changing Inflation Targets."
American Economic Journal: Macroeconomics,
General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Price Level; Inflation; Deflation
National Debt; Debt Management; Sovereign Debt