Public debt, money and consumer prices: a vector error correction model for Germany

In the paper, the authors analyse the interaction between public debt and inflation including the mutual impulse response. The European sovereign debt crisis brought once again a focus onto the consequences of government debt in combination with an expansionary monetary policy for the development of consumer prices. Public deficits can lead to higher inflation rates if the money supply is expansionary. The high level of national debt, not only in the Euro-crisis countries, and the strong increase in the total assets of the European Central Bank, as a result of the unconventional monetary policy, have caused fears of inflating government debt. The transmission from public debt to inflation through money supply and long-term interest rate will be shown in the paper. Based on these theoretical thoughts, the variables: public debt, consumer price index, money stock m3 and long-term interest rate will be analysed within a vector error correction model. In the empirical part of this article, quarterly data for Germany from 1991 to 2014 are to be examined.