The IMF’s debt sustainability analysis paints a bleak picture … about previous IMF assessments and about the prospects for Greece.
The winners and losers of the current monetary environment are not that easy to identify. Investors holding long-term, non-indexed debt gain as unexpectedly low inflation shifts wealth from borrowers to lenders. Governments suffer from increased real debt burdens and reduced revenue due to effectively lower capital income tax rates. Policies that succeed in affecting the real exchange rate entail redistribution.
In his blog, John Cochrane critically reviews arguments in favor of higher inflation in Japan.
He approves of the view that a conventional stimulus argument does not make much sense—given that Japanese growth is around potential and unemployment is low.
He does not approve of the view that inflation would be helpful by lowering (public and private) debt burdens. He doubts that an inflation induced default on outstanding debt would significantly lower taxes (rather than lead to more government spending) and that even if it did, such a default would increase the optimism of young households.
He also questions whether inflation could significantly reduce the real value of Japanese public debt (because debt maturity is short) and whether the debt burden is actually large (given near zero interest rates).