Price stability, inflation targeting and public debt policy

This paper studies the implications of inflation targeting (IT) regimes for public debt accumulation. By utilizing a simple dynamic macroeconomic policymaking model, we show that IT regimes may lead to higher public debt. Our results suggest that in countries where there are inherent distortions in the economy all IT regimes can do is shift the burden of adjustment onto other aspects of macroeconomic policymaking. We therefore argue that, adopting an IT regime without carrying out the required reforms towards eliminating the distortions in the economy is not necessarily an effective device for overall macroeconomic stability