Inflation and Debt Rollover Under Low Interest Rates

ABSTRACT We provide a New Keynesian model with overlapping generations to study the impact of temporary and permanent increases in fiscal deficits financed by debt rollover policy when interest rates are lower than economic growth rates. The debt rollover policy is feasible in the monetary regime but leads to very slow‐moving debt. This policy generates persistent inflation for a temporary increase in fiscal deficits, but persistent disinflation for a permanent increase. For social welfare, the debt rollover policy dominates the conventional fiscal rule to finance a temporary increase in fiscal deficits, but it is dominated if the increase is permanent.