The temptation to deleverage through inflation

Debt ratios decline spontaneously when the nominal long-term interest rate is lower than nominal growth. All else being equal, a rise in inflation therefore reduces the debt ratio. But it is important to note that this concerns inflation calculated with the GDP deflator and not with consumer prices (a rise in import prices does not increase a country’s income - on the contrary - and therefore does not reduce the debt ratio). So might there be a temptation in OECD countries to keep nominal long-term interest rates lower than nominal growth thanks to inflation (the GDP deflator ) without a monetary policy response in order to reduce the public debt ratio? The answer is certainly yes in Japan, no in the United States and more uncertain for the time being in the euro zone and the United Kingdom. Ultimately, however, it is hard to see the ECB and the Bank of England shifting to a deleveraging objective. All one can say is that the delay in fighting inflation has not displease d the governments of the most indebted countries.