At what point does public debt prevent central banks from returning to inflation targeting (inflation control)?
A very high public debt ratio makes it very difficult for the central bank to raise interest rates to control inflation when a surge in inflation appears, as it fears triggering a public debt crisis. We are now seeing that the Bank of Japan has chosen to maintain yield curve control (near-zero long-term interest rates). On the contrary, the Federal Reserve will raise interest rates quite sharply; the Bank of England and the ECB are currently in an intermediate position. But it is clear from the example of Japan that a very high public debt ratio means that inflation targeting has to be abandoned. The question is whether this is already the case in the euro zone, with some countries having very high public debt ratios, or whether the ECB can still maintain an inflation target by managing these countries’ yield spreads, as it has announced. But, eventually, if public debt ratios continue to rise, the euro zone, like Japan, will have to abandon inflation targeting.