Mild inflation prevents divergence of debt to GDP ratio

Abstract

  This paper shows mainly the following results. 1) The debt to GDP ratio cannot diverge to infinity, that is, fiscal collapse is impossible. The necessary and sufficient condition for this result is that the propensity to consume from the asset income is positive. 2) The divergence of the debt to GDP ratio is prevented by inflation when the interest rate on government bonds is higher than the real growth rate. We need only an inflation rate slightly greater than the difference between the interest rate on government bonds and the real growth rate. This inflation is not caused by policy but occurs naturally.