Debt, Deficits and Inflation: An Application to the Public Finances of India
Willem H. Buiter
Urjit R. Patel
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 nonstationarity of the discounted public debt suggests that
indefinite continuation of the pattern of behavior reflected in the historical
discounted debt process is inconsistent with the maintenance of solvency.
This message is reinforced by the recent behavior 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.
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