For holders of a long-term bond, however, it’s quite a tall order to expect any inflation over the course of its life to be “fully anticipated”. It would require them to know years in advance – potentially many years – that it’s coming. In the UK, the government’s conventional debt has a relatively long average maturity: close to two fifths of it was sold more than a decade ago. So in principle, if this were ever the aim of policy makers, there’d seem to be quite a bit of scope to spring “surprise” inflations (a surprise in the sense that it wasn’t foreseen when the bonds were originally sold) and reduce the real value of existing debt without any compensating rise in coupon payments. However, as we’ll see, you need relatively sizeable increases in inflation to make much of an impression on the debt. Though the dynamics are extremely drawn out, the effect is ultimately temporary, as even longterm debt needs eventually to be refinanced12. And central bank asset purchases have made it harder: because it reduces the maturity of its interest-bearing liabilities, QE actually makes the public sector’s consolidated balance sheet less susceptible to any given rise in inflation. 12  Note that this relies critically on trend GDP growth (let’s call it g) being higher than the risk-free real interest rate (r).
7  P. Aghion, P. Askenazy, N. Berman, G. Cette and L. Eymard, 2012. “Credit Constraints And The Cyclicality Of R&D Investment: Evidence From France,” Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1001–1024, October. 8  P. Aghion, D. Hémous and E. Kharroubi, 2014. “Cyclical fiscal policy, credit constraints, and industry growth,” Journal of Monetary Economics, Elsevier, vol. 62(C), pages 41–58. 9  A. Bergeaud and G. Cette and R. Lecat, 2016. “The role of production factor quality and technology diffusion in 20th century productivity growth,” Working papers 588, Banque de France. 10  C. Reinhart and K.S. Rogoff. 2010. “Growth in a Time of Debt.” American Economic Review, 100(2): 573–78; Lane, Philip R. 2012. “The European Sovereign Debt Crisis.” Journal of Economic Perspectives, 26(3): 49–68. BIS central bankers’ speeches  3  impediments to the flow of resources, in particular in the labour market and in the way credit was allocated between sectors, hence revealing that a malfunctioning of the financial sector can reinforce structural weaknesses. 11 In some cases both were present at the same time. Of the uttermost importance were the structural changes targeting an improvement in the monitoring and the resilience of our financial system. Arguably the financial crisis partly resulted from excess risk taking and overinvestment in low productivity sectors. 12 The Basel 3 framework worldwide and the Single Supervisory Mechanism in the euro-zone provide new supervisory and prudential tools to mitigate these risks in the future.